Recent stock gains may not just be about a better trade tone or renewed central bank support. U.S. economic fundamentals have also improved.
The Citi U.S. Economic Surprise Index, a running average of economic data compared to economists’ forecasts, has recently reached levels not seen since April 2018, as shown in LPL Research’s Chart of the Day. Stocks have climbed back near records as data has improved, and stronger economic trends could provide support for further advances.
Large economic surprises in recent data span key economic sectors and include building permits, housing starts, service sector growth, and industrial production.
The upside surprises could indicate that reined-in growth expectations may have grown too pessimistic. While lowered expectations have created an easier target to beat, the string of upside surprises are a reassuring sign that the economy may be stabilizing at a growth rate near the expansion average.
It’s been our argument for some time that the U.S. economy is still exhibiting some positive fundamentals despite trade uncertainty, manufacturing weakness, and slowing global growth. Consumer spending in particular continues to be strong, supported by low unemployment, steady wage growth, contained inflation, and low interest rates.
“With all the negative economic news we’ve seen, it’s easy to miss the recent stretch of upside surprises,” said LPL Financial Chief Investment Strategist John Lynch. “While the U.S. economy has slowed, it continues to show resilience in the face of softer global growth. Trade uncertainty may have offset the expected impact of fiscal stimulus on business spending, but we see still see some beneficial effects from new workers being pulled into the labor force. Add that to a more supportive Federal Reserve, and conditions remain in place for the expansion to continue despite some increased risks.”
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