Gavekal Capital: Economic Data In The Red Zone

Wednesday, March 12, 2014

Economic Data In The Red Zone

All year the Citigroup Economic Surprise indicator has been slipping, reflecting the weak economic readings lately.  Over time, we have found this indicator to be helpful in identifying more risky periods for equities.  In general, as the index slips below zero, the distribution of forward 3-month returns skews negative.  This is indicated in the lower left quadrant of the chart below, the one that is highlighted in red.  Conversely, when the Citi Surprise index is in positive territory, the distribution of returns is skewed positively.  The latest reading of -38 is pushing us further into the red-zone, with negative potential consequences for the equity market.


Perhaps more concerning than the level of the Citi Surprise index is the fact that the stock market has just recently begun to take notice.  In 2013, the correlation between the stock market and the Citi Surprise index was negative, a stark contrast to the 2009-2012 period where correlations were very high.  As correlations flip positive it suggests the equity market is redirecting its attention back to the economy, and away from the Fed.