Economic data is surprising to the upside

Key points:

• The Citigroup Economic Surprise Index closed at a new 6-month high 
• After similar breakouts, the S&P 500 was higher a year later in all but one case
• Bonds and gold tend to struggle when economic data releases beat expectations

Economic data releases are beating expectations

The Citigroup Economic Surprise Index (CESI) measures economic data relative to market expectations. Index readings above zero indicate economic releases have been coming in better than expected. In contrast, the data is worse than expected when the index is below zero. 

Last week, the Citigroup Economic Surprise Index (CESI) closed at the highest level in six months, with the index above zero. The breakout occurred after the index cycled from a pessimistic reading of -50. 

Economic data could continue to surprise to the upside relative to expectations

When the Citigroup Economic Surprise Index (CESI) closes at a 6-month high after cycling from < -50 to > 0, the index tends to rise over the next few months. So, further upside surprises relative to expectations could benefit or adversely impact different asset classes.

Similar breakouts preceded positive returns for stocks

While the history for the CESI is limited, and the signal benefited from bull markets, stocks tend to perform well when the Citigroup Economic Surprise Index is above zero and registers a 6-month high.

In the long run, fundamentals drive stock prices. However, in the short run, especially in bear markets, surprises relative to expectations dictate price action.

From a sector perspective, cyclical groups perform better than defensive ones when economic releases beat expectations and the index breaks out.

Other asset classes tend to struggle

With the possibility of economic data continuing to beat expectations over the next couple of months, long-duration bonds could suffer. The TLT ETF was lower two months later in 11 out of 13 previous instances. 

If economic data continues to surprise to the upside, gold will most likely take its cue from interest rates. So, one must be mindful that gold could struggle over the next few months.  

What the research tells us...

Economic data releases are coming in better than expected. The upside surprises pushed the Citigroup Economic Surprise Index to a six-month high and an overall reading above zero. While stocks have historically performed well when economic data releases beat expectations, this time could be different, at least in the near term. The better data means the Federal Reserve could stay higher for longer. Regardless of the narrative, bonds and gold typically suffer under similar conditions.