US stocks may start performing better than European stocks, as markets continue to grow (why stock markets exist) after dipping in early March. With the Dow Jones Industrial Average and S&P 500 recently rebounding towards the short-term records of March 2 and the US surprise index at its lowest level in years, US stocks may become the beneficiaries of a synchronised bounce that will see European stocks take a hit.
The Dow advanced 228.11 points Monday to 17977.42, a 1.3 percent jump. The S&P 500 gained 27.79 points to 2081.19, an increase of 1.4 percent. The Nasdaq Composite, fuelled mainly by big gains in biotechnology stocks, added 57.75 points to reach 4,929.51, an increase of 1.2 percent. While European markets have enjoyed very strong growth for the year, US stocks are making a comeback as markets wait for the Federal Open Market Committee’s meeting.
European stocks have also risen this week, with analysts expecting the region’s economy to benefit from a weakening Euro. The FTSEurofirst 300 index gained 1 percent, Germany’s DAX rose 2.2 percent to a record high of 12,167.72, and the MSCI International ACWI Price Index rose 1 percent. The German DAX rose by 2.37 percent at one stage on Monday, reaching an all-time high and illustrating just how strong European markets have been in 2015.
While the S&P 500 has only risen by about half a percent in 2015, German stocks have gone up more than 23 percent in the same period. Despite this strength, however, or perhaps because of it, the inter-continental trend may be about to change. According to Andrew Burkly, institutional equity strategist at Oppenheimer Asset Management in a statement to CNBC, “While the surprise index in the U.S remains at high levels not seen since 2012, the performance gap between U.S and European stocks seems to be closing.”
The surprise index is an interesting indicator designed to quantify the amount of surprise in the markets by measuring the extent that other indicators exceed or fall short of consensus estimates. Better-than-expected news is assigned a value of 1, with worse-than-expected news given a value of -1 and news meeting expectations given a value of 0. Values are added up over time, with very negative readings suggesting a market bounce and very positive readings suggesting a market decline.
Even with European stocks continuing to perform well, changes in the surprise index may offer clues on the underlying strength of US stocks in relation to European markets. The number of negative surprises in US data is currently at its highest level since 2012, with European surprises much more positive. With the surprise index used as a contrarian signal by analysts and traders, this data may point to an upturn in US stocks and a downturn in European markets during 2015.
The CitiFX Economic Surprise Index currently has US stocks below -50, with European stocks almost at a mirror level above 50. This clear divergence has made a number of analysts sit up and pay attention, with the US index often rebounding from extreme lows to move in the opposite direction. This kind of synchronised economic bounce hasn’t been witnessed for a long time, with the US and Europe both moving in harmony back in 2012, the last time the US surprise index was lower than -50.
Like always with economic data, however, trends always make more sense when analysed in retrospect. James Paulsen, chief investment strategist at Wells Capital, is not convinced about the message from the surprise index, saying “If you look at it historically, it’s low but it’s not like it hasn’t gotten lower… It’s hard to know when it’s going to turn.”