Economic Surprise Indices to Fall Due to Rising Oil and Yields

S&P 500 returns are positively correlated to the Citigroup Economic Surprise Index.   The Surprise Index leads the S&P 500 by about two months, as you can see from the chart on the left.  Normally, low levels in the index are a good time to buy.  When the index goes from positive to negative, it is a good time to be cautious and stock returns become worse.  For example, the summers of 2011, 2012 and 2015 had big sell-offs, and they were all preceded by falls in the surprise index.

Interestingly, the changes in the US 10 year government bond yield leads the Surprise Index by about six months. The change in the price of oil also tends to lead it as well.  Rising oil prices and yields will be drags on economic surprises ahead, and this will represent a headwind to stocks.