After its less-than-impressive start to the year, the S&P500 has recovered nicely and is once again trading at all-time highs.
The recovery has largely occurred amid fading concerns over emerging market currency volatility.
But just how convincing has this recovery actually been? Ideally, sharemarket gains should coincide with improving economic data and rising company profitability.
It is has become quite apparent over the past few months that US economic growth has stalled.
Recent US data has fallen short of expectations, as measured below by the Citigroup Surprise Index (red line). The Citigroup Surprise Index is a measure that tracks how US economic data has compared to consensus forecasts.
Overlaid in the same chart is the S&P500 Index (green line).
As show, there has been collapse in the red line from early January 2014. The Surprise Index has plummeted to -13.1, its lowest point since mid-2013, indicating most of the US data that has been released in the past two months has missed estimates.
What data points have driven this decline?
Non-farm payrolls have missed expectations by wide margins in the last two months, whilst retail sales fell in January at the fastest pace since last April.
The residential sector wasn’t faring much better, with existing home sales, housing starts and building permits all contracting in January.
US manufacturing activity also ground to a halt in January, with the nation-wide ISM Factory Index nosediving and the Philly Fed Index swinging wildly back into negative territory.
Waiting for the warmth
The S&P500 appears to have already priced in a turnaround in the data. The index has defied the weak economic data trend to be trading at all-time highs, shown by the divergence of the green and red lines in the above chart.
The broad nature of the economic slowdown, which has seemingly come out of nowhere, is largely attributed to the unusually harsh winter weather in the US.
The market is anticipating that once the weather warms up, economic activity will ‘snap’ back to more normal levels.
There is little question that economic activity has been impacted by the weather, helping to explain the severe drop in the Citigroup Surprise Index.
Whether the S&P500 can extend its rally is open to debate, as its forward P/E of 15.8 suggests the index is fully valued at current prices.
For the rally to continue there would need to be a significant rebound in US economic data. The weather cannot be blamed any more for further data misses.
The coming two months are critical in this regard because if the data continues to underwhelm, US stocks face the very real threat of entering a corrective phase.
Written by: marketpulse Other posts from: marketpulse
Posted in Weekly Market Wrap
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