US data have been strong relative to economists' and investors' expectations and compared to global data. Evidence that Europe has entered recession is mounting and in the emerging economies questions are being raised about whether policy-induced slowing can now be arrested through policy easing.

The Barclays Capital US Macro Data Surprise Index has risen from its lowest post-Great Contraction reading in June to a level exceeded only in April 2009 (when the economy was bottoming), underscoring the improved outlook for US growth. For US equity investors, there is a question mark over whether the strength in corporate earnings in 2010 and 2011 is sustainable amid slowing global growth. Our concern is that the market-implied macroeconomic outlook has now improved to the point where disappointment is likely, if not inevitable.

In August, in the aftermath of the debt ceiling debate, US sovereign downgrade and stock market decline, investors became convinced that the plunge in consumer and business confidence would lead the US economy back into recession. The deterioration in the macroeconomic outlook began in May. This followed an April ISM reading above 60 and private payroll growth of 268,000 (later revised to 217,000). These readings, although strong, failed to move the Barclays FX US macro data surprise index above the breakeven line, underscoring how elevated economic expectations had become. Following March, the best month during the recovery for the Barclays Capital Broadlines/Department Stores Same Store Sales Index, April comparable sales disappointed and jobless claims began to rise from their recovery low (also in March). The S&P 500 concurrently reached its 2011 peak (so far) in early May; then, as the macro surprise index fell to its lowest post-Great Contraction level, stocks went lower, underscoring the role that the macroeconomic outlook has played in the direction of US equities since the crisis.

At present, the US economy is apparently decoupling from the rest of the world (in a positive direction) for the first time since the recession. We are concerned, however, that after retailer same-store sales came in better than expected in three out of four months (June-September), both October and November fell short of expectations (despite the Black Friday sales media hype). This, coupled with the recent flattening of the downtrend in jobless claims, could signal another peak in the data relative to expectations. This would leave US equities in a tricky spot; absent an end to the pattern of EU policymakers over promising and under delivering, stocks could lose what has been the single most important catalyst for the rally since the October low in the S&P 500: an improving growth outlook.


source: BarCap