US data has surprised significantly to the upside in recent weeks, and the stock market has continued to be rock solid. Is this a signal, as per the narrative, or noise with false confirmations via correlated markets? Let’s examine that question. The most commonly used data surprise index is Citi’s. This is a chart of the US (yellow) and G10 (white) surprise index.
However, if we use Bloomberg’s surprise sub-indices to break down this, we can see the explosion has been in the “soft” data, the surveys, expectations etc. The “hard” data, the actual results, aren’t doing much. Does this matter to the narrative? (Note: I used a simple average for the five separate hard subcomponents.)
Well yes, it should. As you can see the survey surprise is as high as it’s been since 2000. Furthermore, on these types of overshoot the hard data move has been typically less dramatic. That’s Different What’s odd, this time, is that the hard data isn’t shifting at all. There aren’t any real examples where survey data has shifted so far so fast to the upside with no similar directional move in the hard data, even a less dramatic one. Even accounting for a lag. There is, perhaps, one example to the downside in 2000. Here we can see that the spread of the survey data to hard data is extreme AND the correlation between them has been gone from largely positive in the past to NEGATIVE much of last year and currently. The soft data alone has been of little use recently.
Here is the correlation and regression for soft data surprise vs S&P 500. 90% correlated on a 30day rolling.
Over a longer view the regression chart shows there was no real relationship, until the last couple of years. Now the survey data is a lot like looking at the S&P, as you can see from the non-parametric regression, the current period is the oddity.
This one year chart comparing the SPX vs the US survey surprise index shows that recent correlation nicely too, with S&P leading.
This could be because uncertainty is making people look for guidance on the surveys, with equity sentiment being a significant factor. Or that more junior people are filling out the surveys. Hard to know with certainty. But there’s a clear argument that we are looking at a circular pattern due to correlation.
I.E. Equities go up, based on tax cuts or regulations or simply continued conservative investing habits from the wealthy, and survey data responds to that. Equities respond to the improving data and repeat.
Eventually we need to see a change in behavior on the investment side of the data. Corporates and wealthy percentiles investing, not being conservative. If not the hard data won’t budge, the history is relatively clear, the survey data will mean revert to the hard data.
This is a big risk the Federal Reserve is now running. Their rapid shift to a March hike is potentially on sentiment alone, equities and their meaningfully correlated business surveys. Noise not signal. Credit data and the loan officers survey suggest the credit impulse is soft and hiking on sentiment, sentiment which inflected around an election no less, seems a dangerous precedent to set. Further, there is a danger that this is, again, treated as independent confirmation when it’s a response to the same single move. I.E. is the Federal Reserve is reacting to the single data point and making another correlated market move. What I mean here is equities are up, which has pushed survey data up, and now rates are reacting too – one correlated data point? Or three uncorrelated? Chart of loan officer survey lending standard for consumers, corporates and commercial real estate.
Chart of Consumer loan growth, Corporate loan growth and commercial real estate loan growth YoY %.
What I come back to, again, is that we need to see a change in behavior. The S&P going up is not new (see Steve’s piece Nothing to See). Survey data responding to equity valuations is a relatively new phenomenon, but not a sudden change. It’s not independent confirmation. This is a great example of what to be watching. Capital goods orders ex defense ex aircraft. There has been a modest bounce, taking YoY growth positive, but it’s still very weak.
This narrative is very plausibly noise from a single factor, equities moving higher and resultant correlations. Correlation of S&P to survey data is at 90%, Correlation of survey data to hard data is negative.
By focusing on surprise index, you are really looking almost entirely at survey data and by looking at the survey data you are, in reality, just looking at the S&P.
Be wary about thinking that you have multiple signals supporting the idea of growth pick up, when in fact it's just one. Further, given Bija’s view that US equities are a function of risk aversion not growth, the fed and those attempting to predict the future of the economy are potentially making a mistake.
This narrative is vulnerable to a delay, or loss of faith, in tax cuts or to a Federal Reserve hike which is purely on sentiment, even as the credit impulse weakens.
A move lower in equity markets is likely to see surveys retrace rapidly, which would give a similar confirmation risk to the downside. This suggests volatility.
We need to watch investment data specifically, and hard data points generally, closely.
Trade Thoughts This is more noise than signal, for now. This is non-consensus in that it fights the common current narrative. Thus, your trading plans should not be significantly altered. This is where you re-read Steve’s Seed’s piece, What Makes Trading So Difficult.?
The narrative, and likely everyone around you and on TV, is saying everything changed. That this is a signal. But the evidence is not yet clear. So, this is where you add value by not being shaken out of views, or by entering those positions you planned to if things got too optimistic on noise alone. With a clear plan of when to cut, for example if the hard data starts to pick up.
"While everyone else is scrambling to answer who, what, where and when, Duneier is focused on explaining the 'why'."
For more than 15 years, Jake Vincent has put his education in psychology to work as an institutional investor specializing in global macroeconomic analysis, portfolio management and trade structuring.
In 2007, Mr. Vincent joined the newly launched Comac Capital, where he ultimately served as Head of Strategy, helping the fund grow to $6.5 billion in AuM, thanks in large part to 30%+ returns during the financial crisis.
Following Comac's transformation from hedge fund to private family office, Mr. Vincent left to become a Global Macro Portfolio Manager at Balyasny Asset Management. While there, he developed a disciplined, process-driven approach to investment and portfolio management as a result of his work with Bija Advisors, and specifically, CEO Stephen Duneier. The innovative applications of decision architecture and other techniques borne out of the cognitive sciences resonated with Mr. Vincent, given the direct link to his studies in Psychology and Philosophy at Durham University in England, and as a member of the British Psychological Society.
As a Senior Advisor at Bija Advisors, Mr. Vincent draws from his experience as a sell-side strategist at Standard Chartered, Merrill Lynch and Credit Suisse in New York and London, and experienced hedge fund manager. He delivers his own unique brand of insight on global macro themes, behavioral investment process, and trade ideas through Bija publications. In addition, Mr. Vincent is responsible for constantly improving the Bija client experience and curating our rapidly growing community of clients and subscribers. Mr. Vincent is a former board member and current advisory board member for non-profit Mentor Me, and is currently launching a new non-profit aimed at improving education for financial and retirement planning.
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