Chart Of The Week   October 13 2022

Good News Is Bad News?

US Economic News

The US economic surprise index – which measures the extent to which the economic data is either beating or missing economists’ forecasts – has recently moved back into positive territory. A move above zero indicates that economists have been overly pessimistic and have been underestimating US economic conditions.

Since the beginning of the year, the S&P 500 has generally moved in line with gyrations in the Economic Surprise index. US stocks benefitted during periods when economic data consistently surprised to the upside, and equities fell when data disappointed consensus expectations.

However, this relationship has recently shifted. The S&P 500 has been selling off for the past two months even though the surprise index has been improving. This move from a positive correlation to a negative correlation suggests that we may now be in a “good news is bad news” environment. Positive data surprises imply that the economy is holding up better than expected. And as long as inflation remains unacceptably elevated, this economic resilience reduces the likelihood of an imminent softening of the Fed’s hawkish stance.

Thus, the latest divergence between the economic surprise index and the S&P 500 indicates that investors are reducing their odds of a soft landing scenario for the US economy. Instead, they are concerned that the Fed will need to continue to tighten policy aggressively to weaken economic conditions further and ultimately bring inflation back down to its 2% target.