Overview:
- Past string of negative economic surprises abating
- Leading economic indicators suggest positive momentum should persist
- Market internals starting to reflect improved econ backdrop
- Breakout in recent trading range likely to the upside once we can get Greece behind us
Today we received the Chicago Fed’s National Activity Index for May. It shows the US economy is currently growing below trend, but reasonably above recessionary territory (red dotted line).
Source: Bloomberg
Earlier this year, US economic data came in remarkably worse than economists had expected. Bloomberg's US Economic Surprise Index was showing the lowest reading since the 2008 financial crisis and some believed the US was facing a recession. Negative suprises have started to abate with data improvements and adjustments in expectations.
Source: Bloomberg
When we break out the suprise index into its various sectors, the largest factors that have been surprising to the downside are surveys and business cycle indicators as well as retail & wholesale sector data. Housing has been the most bullish surprise to the economic data.
Source: Bloomberg
Leading economic indicators suggest the recent string of positive data surprises should continue well into the fall. The National Federation of Independent Business (NFIB) conducts a monthly small business survey and they ask respondents to list their most important problems. One of the most important categories, sales, is a great leading indicator of unemployment and shows the unemployment rate should continue to drop.
Source: Bloomberg
While the biggest drag on the Bloomberg economic surprise index has been business surveys and cycle indicators, there is good news on that front as well. As shown many times in my recent articles, the relative performance of early to late-stage cyclical performance suggests the manufacturing component of the economy should begin to pick up ahead and is improving right on schedule.
Source: Bloomberg
Signs of an improving economy are not being lost on the market, which is also showing signs of improvement beneath the surface. The Russell 3000 Index represents 98% of the investable US equity market and hit a new intraday high today of 1275.89. What is most encouraging was the expansion in new 52-week highs by its members. With 307 stocks hitting new 52-week highs and only 19 hitting new 52-week lows, the expansion in 52-week highs represents the 4th highest reading in the past year. As seen below, while the Russell 3000 has traded sideways for the last two months (white line below) the percentage of stocks hitting 52-week highs (green bars) has been trending higher.
Source: Bloomberg
Looking further into the data provides even more encouraging information where two of the most cyclical sectors of the market are leading the charge higher. As of Friday, 27.5% of the financial sector hit a 52-week high over the last five trading days and 25.71% of the consumer discretionary sector hit a new 52-week high.
Source: Bloomberg
Also encouraging is seeing who is populating the 52-week low data for the Russell 3000, which, outside of energy, are defensive sectors with 10.8% of the consumer staples sector hitting 52-week lows and 8.32% of the utility sector hitting 52-week lows in last week’s trading.
Source: Bloomberg
If the market and economy were running into trouble we would typically see the defensive sectors dominating new 52-week highs and the cyclical sectors dominating new 52-week lows. Currently, we are seeing just the opposite, which suggests the market is healthier beneath the surface than many may realize. The data above suggests that the market’s trading range over the past several months will likely be resolved to the upside and supporting that view is the fact that the more aggressive indices like the Russell 2000 small cap index or Russell Microcap Index have recently hit all-time new highs.
Summary
It appears the US economy is finally making a turn after a disappointing and negative first quarter. Recent data has been surprising to the upside and suggests along with leading economic indicators that the US economy will continue to expand and the risk of a recession remains low. This trend should persist well into the fall, which continues to put on the table the likelihood of our first Federal Reserve interest rate hike since 2006. When the Fed first raises is still a question mark that is likely to be an overhang on the market for the coming months and the ongoing Greek saga is likely to be a near-term market overhang.
Greece appears to be coming to the compromise table with its creditors and it may yet be possible to see a deal struck before its June 30th payments are due. I believe if we get some kind of deal struck the markets can at least temporarily put Greece behind it and see a rally into the summer, which is suggested by the improvement in the market’s internals.
