A trader works on the floor before the closing bell of the Dow Jones at the New York Stock Exchange on March 21, 2017 in New York. 
Wall Street stocks fell sharply amid increasing doubts about the prospects for President Donald Trump's agenda, especially ahead of a key congressional vote on health care in two days. / AFP PHOTO / Bryan R. SmithBRYAN R. SMITH/AFP/Getty Images

On reflection, markets have decided that last week’s US healthcare debacle wasn’t such a big deal, with the global economy’s bright patch playing a big role in soothing nerves. Unfortunately, US data actually paints a slightly muddled picture.

Optimists point to Citi’s global economic surprise index, a gauge that measures how often data turn out better than expected. It has been running at a seven-year high for most of 2017 thanks to long and broad string of positive readings. Bloomberg’s equivalent US index is at a five-year high. But look under the surface and complications for equity bulls become apparent.

So-called “hard” and “soft” US economic data are splitting so dramatically that an Olympic gymnast would applaud. Morgan Stanley’s economists reckon the “stunning” divergence is the biggest since at least 2000.

Softer data points, such as confidence surveys, are running red-hot. Consumer sentiment this month shot up to its highest level since 2000, and small business optimism is near its highest reading in 43 years. But real-economy data continues to bumble along at the same uninspiring speed, with February’s underwhelming 0.1 per cent rise in US retail sales a case in point.

How this is reconciled matters hugely to markets. If the hard data prove stubbornly unmoved by evidence of animal spirits, then investors may give up on the “reflation trade” that has dominated markets since last summer. But if the surveys are pointing to a real economic upswing, then the stock market bull run may have even further to run.

Soft data are still data, and the roused animal spirits they indicate is clearly encouraging. Indeed, it is hard to imagine them not translating into at least somewhat increased consumer spending and business investments. On Wednesday US fourth-quarter growth was marked modestly up, to an annualised 2.1 per cent, with better consumer spending making up for still-limp corporate investment.

But with US equities at punchy valuations and a reduced likelihood of tax reforms, rising optimism needs to be translated into solid economic and earnings growth, otherwise markets might still be in for a challenging year.


Chart: US economic surprise index

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