Disappointments to the Downside

July 16, 2024 | Evan Frazier, CFA, CAIA, Senior Research Analyst

Many readers likely know that when it comes to investor sentiment and market performance, economic results relative to forecasts can be just as important as the results themselves. To that point, the Bloomberg U.S. Economic Surprise Index currently sits at roughly -0.6, which represents its lowest level in nearly a decade. According to Bloomberg, this index is an objective and quantitative measure that aggregates the differences between actual economic data and the median forecast from surveys of economists. Said another way, the index measures the degree to which U.S. economic data releases surprise to the upside or downside relative to market expectations. The index compiles various U.S. economic indicators, including employment numbers, GDP growth, inflation rates, and consumer confidence, then each economic data release is compared to the consensus estimate and the difference is standardized. A positive index reading indicates that economic data have, on average, been better than expected, while a negative reading indicates that data have been worse than expected.

Recent data releases that have driven the Bloomberg Economic Surprise Index lower include U.S. manufacturing activity, which contracted for a third consecutive month in June as measured by the ISM Manufacturing PMI. Many economists expected this gauge to increase from the 48.7 figure exhibited in May to 49.1, but it instead fell to 48.5. Additionally, the U.S. ISM Services PMI, which measures the economic condition and performance of service-based companies, dipped to 48.8 in June. This represents the sharpest contraction for that index in more than four years, meaning forecasters who were expecting the June figure to be closer to 52.5 after a 53.8 reading in May were far off the mark.

Interestingly, equity markets seem to be largely unphased by these disappointments to the downside, as the S&P 500 Index has returned nearly 12% since the Bloomberg Economic Surprise Index fell into negative territory roughly 10 weeks ago. This is likely in part due to the fact that readings of inflation, perhaps the economic metric investors are currently watching most intently, have actually come in below consensus expectations over the last three months (as measured by CPI). That said, continued downside surprises could spell trouble for equities, as major stock indices have tended to display a material degree of correlation to the Bloomberg Economic Surprise Index over the last several decades. In the months ahead, investors should consider both the absolute levels of indicators, as well as releases relative to forecasts, in order to properly assess the impact of economic data on market performance.

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