Tuesday's disappointing Empire State manufacturing survey is the latest in a series of weak U.S. economic data points. The Citi Economic Surprise Index for the American economy – which measures economic data relative to economist consensus expectations – has dropped more than 70 per cent since Jan. 15.
For Canadian investors looking to add to U.S. equity holdings, this is good news in a roundabout way. The surprise index has followed the same pattern since 2010 with early strength turning to disappointment in Late February or March.
In each year, the index has bottomed between May and July and accelerated higher to year end. For patient domestic investors, if the pattern holds, a buying opportunity will become available in the next few months.
The Surprise Index is a best used as a sentiment indicator. It doesn't measure the U.S. economy, which remains on a slowish growth path, it measures the accuracy of economist predictions.
So, I can speculate that part of the reason for the seasonal pattern is that investment bank economists are almost always bullish at the beginning of the year. When the actual early-year growth results fail to meet economists' optimistic projections, the surprise index falls.
The seasonal pattern is apparent, no matter what the reason. It suggests that Canadian investors should spend the next few weeks building a shopping list of U.S. equities – I took an initial stab at it here and here – and the price targets that would make them compelling. Beginning in mid-May, investors can use technical analysis to attempt to find short-term bottoms on the long-term investment they've chosen.