|GOOD ECONOMIC NEWS ISN'T ALWAYS GREAT NEWS FOR INVESTORS|
Aruba, March 21, 2017 - Good news keeps coming for the U.S. economy. For contrarian investors, this isn't exactly great news.
Consumers say they feel better about the economy than they have in the past 17 years. Optimism among small-business owners has surged since the election. Jobs are plentiful and wage growth is strengthening. New data coming this week, including reports on existing home sales, new home sales and durable goods orders, should contribute to the positive trend.
Stocks have responded to the improving economy and President Donald Trump's promises to cut regulations and reduce taxes. The S&P 500 is up 11% since Election Day and hovers near its record high. But in these heady times, it is important to remember when markets historically perform best: Not when the economy is booming, but rather when its performance is exceeding diminished expectations. A good way to measure this is the Citigroup Economic Surprise Index.
This rolling indicator measures economic data relative to forecasts. This means that, when reports such as employment, inflation and manufacturing are beating estimates, the index usually moves higher. When data fall short of expectations, Citi's indicator typically moves lower. The index, which bounces above and below zero, has been on the upswing for months and rose to 58 last week, a fresh three-year high.
Maintaining that trajectory won't be easy. That is because forecasters are getting more optimistic. For instance, economists surveyed in The Wall Street Journal's latest monthly poll now expect economic growth of 2.4% this year and 2.5% in 2018. Both forecasts are up from 2.2% and 2% in pre-election surveys, respectively.
More often than not, forecasters incorrectly extrapolate recent trends for what will take place in the future. That is typically what prompts the surprise index to decline, with stocks often following suit.
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