6.22.20 Volatility in Economic Forecasts at an All-Time High
The Citigroup Economic Surprise Index, or CESI, tracks how the economic data fare compared with expectations. The index rises when economic data exceeds Bloomberg consensus estimates and falls when data is below forecasts. The CESI has had a volatile year in 2020, as the effects of lockdowns in response to the outbreak of COVID-19 significantly impacted the global economy. As shown in the LPL Chart of the Day, following an all-time low in April, the index has skyrocketed to a new all-time high as the economy’s reopening process continues.
While the data appears noisy, we think it’s indicative of the unprecedented current environment. Although the term “uncertainty” is often used with a negative connotation, the recent moves in the CESI show that uncertainty can exist to the upside and the downside. “Forecasting economic data in this environment can be been challenging,” added LPL Chief Investment Officer Burt White. “However, if data is improving relative to expectations, perhaps this equity rally isn’t entirely disconnected from fundamentals.”
It is also important to note that positive and negative feedback loops feed on themselves—as expectations grow more positive or negative, they raise and lower the bar for economic releases. These feedback loops are what make the data in the CESI inherently choppy. As several headline indicators—such as the May nonfarm payrolls and retail sales numbers—have come in considerably better than consensus forecasts, future releases may have a tough time meeting loftier expectations.
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