Active investment management’s weekly magazine for fee-based advisors

Two recent economic data points came in considerably outside of analyst forecasts, helping to fuel the equity market volatility seen in May.

The Cboe Volatility Index spiked over 25 midmonth and has been generally elevated throughout May compared to a more benign April.

FIGURE 1: MAY’S HIGHER READINGS FOR THE VIX

Source: Cboe Exchange Inc.

The surprising miss of the employment report released on May 7 was one contributing factor to the market’s volatility.

April’s payroll numbers came in at just 266,000 jobs, well below forecasts for 975,000. It was one of the biggest misses in the history of the data series.

Then, according to Barron’s, “The consumer-price index rose 0.8% in April from March—more than quadruple expectations for a 0.2% rise.”

MarketWatch noted on the price data, “Rising inflation pressures are getting the blame for heightened stock-market volatility after data earlier this month showed the consumer-price index rose a hotter-than-expected 4.2% year-over-year in April. That prompted fears the Fed could move earlier than anticipated to begin pulling back on its monetary policy accommodation.”

Despite the hotter readings on inflation and the disappointing jobs report, there has been some positive economic news as well, which helped the VIX get back under 20 and market performance return to basically flat last week.

While continuing unemployment claims unexpectedly rose in the week ending May 15, the Department of Labor said new initial claims came in at 444,000, “a decrease of 34,000 from the previous week’s revised level. This is the lowest level for initial claims since March 14, 2020 when it was 256,000.”

FIGURE 2: INITIAL CLAIMS FOR UNEMPLOYMENT INSURANCE

Sources: CNBC, Department of Labor

And The Conference Board Leading Economic Index (LEI) for the U.S. increased by 1.6% in April to 113.3, following a 1.3% increase in March.

The Conference Board remarked in its press release on May 20,

“‘With April’s large monthly gain to start the second quarter, the U.S. LEI has now recovered fully from its COVID-19 contraction—surpassing the index’s previous peak, reached at the very onset of the global pandemic in January 2020,’ said Ataman Ozyildirim, Senior Director of Economic Research at The Conference Board. ‘While employment and production have not recovered to their pre-pandemic levels yet, the U.S. LEI suggests the economy’s upward trend should continue and growth may even accelerate in the near term. The Conference Board now forecasts real GDP could grow around 8 to 9 percent (annualized) in the second quarter, with year-over-year economic growth reaching 6.4 percent for 2021.’”

FIGURE 3: THE CONFERENCE BOARD LEADING ECONOMIC INDEX (LEI) FOR THE U.S.
INCREASED IN APRIL

Source: The Conference Board

But Barron’s notes that, overall, “U.S. economic data has been mostly weaker than expected” recently:

“The Citigroup Economic Surprise Index, a measure of how much economic releases are beating or missing forecasts, has fallen from its highest level on record to about flat, a sign that expectations were too low and are now too high.”

FIGURE 4: CITIGROUP ECONOMIC SURPRISE INDEX

Sources: Citigroup, Yardeni Research

Bespoke Investment Group does not see anything particularly troubling in this reversion to the mean on economic surprises to the upside, noting that its proprietary Economic Indicator Diffusion Index has trended similarly but has been “consistently positive” for the past year, outside of an “eight day period last May and an eleven day period in January.”

Recent Posts:

How financial therapy could benefit your clients—and your practice

As wealth management becomes increasingly holistic, more advisors are either enlisting the help of a certified financial therapist or enhancing their own communication and empathetic skills—or both.What do you do when clients agree to a financial plan and timetable...

Have the Roaring ’20s returned?

While recent economic news is encouraging, no one has a crystal ball as to the market’s future performance. There is no better time to make sure clients’ risk-management plans are in place.In a recent Proactive Advisor Magazine article, the author (a successful...

The inflation songbook: Play it again

Article highlights Inflation is not a one-off change in the price level caused by a short-term distortion to protect profit margins but is a persistent acceleration in prices. Pundits who are talking incessantly about the “Roaring Twenties” never tell anyone that for...