Will Rampant Investor Optimism And A Slowing Economy Collide To Produce A Correction?
The US Economic Surprise Index measures the frequency that economic reports exceed or fail to meet analyst estimates. For example, the strong stimulus-induced recovery from March 2020 beat estimates by a wide margin through year-end 2020. Since that time, the ability of economic reports to exceed expectations has declined swiftly, indeed they have turned negative, suggesting that the real economy is significantly weaker than consensus opinion.
It is worth noting that the chart illustrates the ability of the Surprise Index to act as a reliable leading indicator for S&P 500 earnings estimates. That earnings estimates have yet to reflect a rapidly slowing economy, as we enter the seasonally weakest period for equity markets, is a contributing factor to our view that markets currently offer poor risk/reward prospects to investors. The eventual downward revision in analyst estimates in response to the slowing economy is but one of several potential catalysts that could produce a market correction.
We continue to endorse a strategy to preserve the bulk of profits accrued during the rally from the 2020 low. We will update the strategy we use with our long positions, as well as our portfolio hedge, in the upcoming September issue of the Global Investment Letter.
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