There Can Be A Dark Side To This Spree Of Happy Economic Surprises

There Can Be A Dark Side To This Spree Of Happy Economic Surprises
Stéphane Renevier, CFA

6 months ago1 min

Economic indicators have a big impact, but it's the surprises – the unexpected twists and turns in the numbers – that really move stock prices. Prices reflect what investors believe the future will hold, so when reality doesn't line up with consensus forecasts, that’s when prices take their most scenic detours. And lately, these “surprise” moments in the hard data (in concrete numbers like economic growth, employment figures, and retail sales) are hitting an unusually positive high.

That’s been amazing, but it’s also a double-edged sword. On the plus side, it indicates that the economy is a lot more resilient than feared. This raises the odds for a soft-landing – that dreamy scenario where inflation gently goes back toward its target without a nasty recession.

But on the flip side: while positive surprises tend to follow positive surprises over the short-term, they do eventually swing back toward average in the longer term, primarily because investors recalibrate their expectations. So, with happy data surprises hitting peak levels now, an unhappy reality check is probably not far away.

Let's not forget, a streak of less rosy – or even downright grim – surprises doesn't necessarily mean a market crash is nigh. But they do merit your attention. With volatility at (worryingly) low levels and a market that may be running before it can walk, we've got ourselves a recipe for a possible jolt just now. So keep your eyes peeled and portfolios prepared: in the market's box of chocolates, some surprises can leave a bitter aftertaste.



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