A recent spate of positive data has heightened hopes that the U.S. economy is vanquishing its many demons.
Whether it was the blockbuster June payrolls number, the strong retail growth earlier this month, or something more recent such as Tuesday's reported jump in new home sales, indicators have been on balance considerably better than expectations.
That's got Wall Street excited that after a long period of mediocrity, the economy finally may have reached an inflection point. However, the optimism may not be on particularly solid ground, with the economy likely still trudging along despite some recent positive surprises.
The Street closely follows a barometer called the Citi U.S. Economic Surprise Index. The measure is different from others in that it depends less on what the actual data readings are and more on how they compare with expectations.
A reading above zero means that the data on balance are coming in above expectations, while a negative reading indicates an economy that is underperforming. Lately, indicators have been crushing estimates, after the index spent a year and a half in negative territory. Paul Hickey at Bespoke Investment Group noted in a tweet Tuesday that the index is in clear "breakout" mode as judged by its behavior over the past 12 months:
Periods when the index rises into positive territory often are positive for stocks. Over the past decade, the S&P 500 was higher 79 percent of the time with a median gain of 5.2 percent six months after periods when the surprise index rose above zero, according to Burt White, chief investment officer at LPL Financial.
"We have also observed better performance from the more economically sensitive sectors in these scenarios. Both good signs," White said in a note to clients.
A few words of caution, though, are warranted before getting too excited about this "surprise."
Most notably, the breakout that Hickey observed came in early July and coincided with the realization that the Brexit vote would not, in fact, be the end of the world. A look at the index from the beginning of July tells the story: