Source: Ryan Hyde
Is this the most hated stock market of all time? Probably. There's definitely a lot of angst out there.
A slew of stories recently report on some supposedly disquieting economic developments. The Citi Economic Surprise Index, an index that attempts to project future changes in the U.S. economy, has been tumbling of late. Stock market bears rejoiced... but missed the broad strength belying the Citi index's weakness. Here are a few headlines.
- ValueWalk: Citibank economic surprise index has fallen off a cliff
- Bloomberg: Temperature of U.S. Economy Running Cooler Than Forecast
- CNBC: This chart reveals economists may be overestimating the 'Trump bump'
- Zero Hedge: Citi Issues An Alert On Its Most Popular Index
Some of the concern has been focused on how the stock market has become increasingly disconnected from the Citi surprise index.
Despite all the concern, the S&P 500 hit a new all-time high today. Meanwhile, the Nasdaq registered an all-time closing high of 6321 on June 9th, 2017 and has since corrected -2.7%. But remember, in the past six months, the Nasdaq is up +16.7% versus +8.2% for the S&P 500. No surprise therefore that at such lofty levels, the Nasdaq sold off at the all-time highs.
The more important question is where do we go from here?
We've been saying buy U.S. equities, specifically the Technology sector, on pullbacks for the past 6 months and we reiterate that call here. Why? The U.S. economy is accelerating.
No, the weakness of the Citi Economic Surprise index doesn't factor into our modeling of the U.S. economy. We measure and map the year-over-year rate of change in economic data and have our own predictive tracking algorithm that weights these economic indicators and spits out an estimate for GDP. Our proprietary GDP algorithm has year-over-year growth accelerating from an estimated 2.35% in 2Q17 up to 3.05% by 1Q18.
Below is an image of the 30 key economic indicators we track each month, for a total of 90 readings each quarter, as inputs into our GDP tracker. If this looks complicated that's because it is but we don't argue with the data. Some of the most heavily weighted GDP factors, like labor data, trade data and inflation, are moving in the right direction, hence our growth accelerating call.
Consider last week's Industrial Production data. "The year-over-year growth rate for US Industrial Production Growth accelerated to +2.2% last week," writes Hedgeye CEO Keith McCullough in today's Early Look. "That was a 29 month-high. Somehow these 'hard' economic data points never find their way onto Zero (H)edge or the Citi “Surprise” index, but I digress…"
There's plenty more growth accelerating data to consider. How about corporate profits? After falling for five straight quarters, from the second quarter of 2015 to the second quarter of 2016, S&P 500 aggregate earnings per share growth has accelerated for three straight quarters to +15%.
With some of the highest GDP estimates on Wall Street heading into the back half of 2017 and early 2018, we're comfortable with our call that U.S. growth is accelerating and investors should continue to buy stocks on market pullbacks. Specifically, we think investors should be long Large Caps, Growth Stocks & Technology shares.
And if you want more data on why the 'Most Expensive Stock Market Since Crash of 1929' can keep going up, watch the video below.
