September 12, 2021


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Bottom Line:


Economists have sharply downgraded economic forecasts recently due to the volume of disappointing data. However, the data is the data. The disappointments come from economist overestimations. The resurgence of COVID complications from the Delta virus blindsided prognosticators and ushered in a corrective response. However, overshoots often lead to undershoots as economists over-correct. Rapid declines in economic estimates improve the probabilities for positive surprises, and positive surprises are the best fuel for market rallies. With Delta cases receding in the South and consumer wallets flush entering the holiday shopping season, we may find ourselves poised for better-than-expected year-end economic data and therefore… better than expected year-end investor returns.


The Full Story:


The combination of Labor Day hangovers, recognition of September’s lousy track record, and recently disappointing economic releases has led to five consecutive days of market selling. This may not sound noteworthy, but there has only been one other five-day sell off so far this year. This market has been remarkably resistant to downforce, but with COVID raging and abundant shortages stunting growth economy-wide, economists have been lowering growth expectations which challenges bullish orthodoxy.


The Atlanta Fed predicts 3.7% GDP growth for the 3rd quarter versus expectations of 6.1% growth as the quarter began. The New York Fed predicts 3.8% GDP growth for the 3rd quarter versus expectations of 5.2% growth as the quarter began. Goldman Sachs recently lowered their full year GDP growth forecast from 6.4% to 5.7%, stating “the Delta variant is already weighing on Q3 growth, and fading fiscal stimulus and a slower service sector recovery will both be headwinds in the medium term.”


As a prelude, we wrote a couple of weeks ago about collapsing individual investor sentiment with the AAII Bears outnumbering the AAII Bulls for the week ended August 18th. We also cited the Bears>Bulls condition as a traditionally bullish indicator for stocks, and indeed stocks rallied to new highs shortly thereafter. However, with the presumably more accurate and dispassionate economist sentiment now collapsing, will our same contrarian optimism hold?


Bad Surprises Lead to Good Surprises


The Citigroup Economic Surprise Index measures the degree to which economic data releases register above or below economists’ expectations. Given the impact of the unforeseen Delta virus, recent data releases have undercut pre-Delta forecasts, leading to a steep decline and a deeply negative current reading in the Citigroup Economic Surprise Index:




At -60.5, the Citigroup Economic Surprise Index has fallen to levels rarely seen. In fact, over the last 15 years, the index has only fallen below these levels three times: during the Great Financial Crisis, the Euro Crisis, and the COVID Crisis.


Now, given the amount of catchup economists had to play by hurrying estimates higher in the roaring post-COVID economy, some overshoot should have been expected. But, faced with a sobering round of negative surprises, economists have cut estimates precipitously, perhaps to the point of overshoot once again. If so, the recent rash of negative surprises that have led to the recent rash of downward forecast revisions simply refills the reservoir for future positive surprises!


Our friends at Leuthold have also noticed the sizable decline in the economic surprise index, but also highlight the concurrent rise in the US dollar (a risk-off reflex) and reflective decline in industrial commodity prices.


Should the Delta variant downshift nationwide (as it has already in the South), consumer sentiment, service industry economics, and economic data overall should upshift the Economic Surprise Index and industrial commodity prices, while pressing the US dollar lower (a risk-on reflex). In the past, the “Hat Trick” combination of rising economic surprises, rising industrial commodity prices, and a falling US dollar has led to superlative stock market returns:





Things overall could certainly deteriorate from here, and consumer, investor, and economist sentiment indices have all fallen back towards cycle lows in anticipation. Matching up these low sentiment levels with receding Delta case counts and swollen consumer balance sheets entering the holiday season may precipitate surprising results for economists and investors alike. In fact, in addition to cutting their GDP growth estimate for 2021, Goldman Sachs also raised their GDP growth estimate for 2022 from 4.3% to 4.6%. Surprise!


Have a great Sunday!


David S. Waddell 
CEO, Chief Investment Strategist



Sources: The Leuthold Group
David Waddell
Author: CEO Chief Investment StrategistAfter graduating from the University of the South with a BA in Economics, David began his career with Charles Schwab & Co., Inc. in Phoenix, AZ. Having been recognized for his outstanding business development record, David was promoted to the San Francisco- based Institutional Strategic Accounts Team, which interfaced with the Big 5 accounting firms and Schwab’s largest customers. David left Schwab to continue his education at the graduate level in Boston. While earning his MBA degree with a concentration in finance and investments at the F.W. Olin School at Babson College, he was appointed by the college Trustees to manage a team of seven portfolio managers overseeing the student-managed portion of Babson’s endowment fund. David also founded the Babson Investment Management Association to assist undergraduate and graduate students with training and career path planning in the investment management field. As the firm’s Chief Investment Officer, David chairs the W&A investment committee and combines macro economic forecasting, macro market analysis and macro risk assessments to design portfolio strategies utilizing public market securities worldwide. A civic leader in Memphis, David currently acts as Chairman of Epicenter Memphis, and Co-Chair of the Memphis Chamber Chairman’s Circle while also serving as a board member for LaunchTN and the New Memphis Institute. David previously served as chairman for The Leadership Academy, the RISE Foundation, and the Economic Club of Memphis. He also chaired the capital campaign to build the “Live” stage at the Memphis Botanic Garden. David was a member of the 2004 Leadership Memphis class and has been recognized as one of Memphis’ “Top 40 under 40” by the Memphis Business Journal, and as a finalist for “Executive of the Year” in 2007. In addition to weekly columns in the Memphis Daily News and the Nashville Ledger, David has appeared in the Wall Street Journal, USA Today, Forbes, Business Week, Investment News, Institutional Investor News, The Tennessean and Memphis Business Journal. He has also made appearances on Fox Business News, Yahoo Finance, Bloomberg TV, CNBC, and CBS News and ABC News Channels. Read some of David's articles on his author page in Inside Memphis Business. David has two wonderful children, Easton and Saylor, an obedient Labradoodle named NASDAQ, and a devoted Goldendoodle named Ripley.


David S. Waddell


Chief Investment Strategist

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