What the markets think of surprises | Markets | 10/25/2021

Recently, investors have been surprised twice, in both cases it has not been particularly pleasant. Inflation was surprisingly high and economic data was surprisingly low. Sven Lehmann has studied how major asset classes have responded to such surprises in the past.

In the first step, Sven Lehmann, fund manager at HQ Trust, evaluated two “surprise indicators”: the Citigroup Economic Surprise Index and the Citigroup Inflation Surprise Index. Both barometers measure how well actual development matches expectations. If the indicator is in positive territory, the actual development was higher than the respective forecast – and vice versa.

Two steps of analysis
In a second move, Sven Lehmann analyzed the average development of stocks, gold and bonds over the next twelve months based on surprising indicators. Overall, this period was positive for all three asset classes, but average returns varied significantly depending on the starting position. The study covers the years from 2003 to the present day.

In the past, gold was the best way to lead in a situation like today
In the current situation of surprisingly high inflation and surprisingly weak economic data, gold has been the best performer in the past. The following graphic depicts this relationship. The average development in US dollars of asset classes over the next twelve months is shown, based on Citibank’s surprising inflation and economic factors.

Coil: Refinitiv, HQ Trust

More results
“In today’s scenario with surprisingly high inflation and surprisingly weak economic data, gold did better, the S&P 500 and 10-year Treasuries were on par with about six percent plus, but for stocks it was the worst outcome of the four groups,” Lyman says to the report. Moreover: “The precious metal has developed the best in history, with surprisingly high inflation and surprisingly good economic data. Then the average growth was 17.3%. On the other hand, if inflation is surprisingly low, stocks will benefit disproportionately. “According to Lehman, it doesn’t matter whether the economic data is surprisingly good or bad. Either way, the increase was about 14 percent.”
Bonds have performed the worst in an environment of surprisingly low inflation and economic data.” (kilobytes)