Ajit Agrawal, Rhea Pandit*, Neeraj Sudhakar
One of the interesting questions investors ask is whether Nowcasting can provide insights into the economic cycle. We show that our weekly Nowcasting outcome is a strong barometer for the global economic growth and slowdown.
First, we establish that the AKAnomics Nowcasting outcome conforms to the economic cycle, based on the historical revenue estimates of the 100+ US Industrials, and Materials companies we track using global macro and industry data. The chart below shows that the actual aggregate quarterly company revenue growth for the group** closely follows global industrial production. This should be expected. Further, AKAnomics aggregate company revenue growth estimate closely aligns with the actual quarterly company revenue. This should also be expected from a decent Nowcasting process. As a result, we see a strong relationship between Nowcasting revenue growth estimates and the economic cycle.
We further analyze if there is a relationship between the economic cycle and the magnitude of revenue surprise (vs consensus) as measured by AKAnomics Nowcasting. This metric is an important metric for investors since it takes market expectations into account. The chart below confirms that direct relationship over the past 10 years (except for the height of COVID and related periods one year later). This finding is a bit surprising, as one would have assumed that the market should be able to adapt its expectations of the economic cycle more rapidly than it does.
We go further to see if our simpler weekly dispersion metric of % of companies that are expected to beat revenues minus the % of companies that are expected to miss revenues also follows the same pattern (see graph below). And it does with significant fluctuations along the cycle. This metric does not fully account for the magnitude of the surprise, which the previous metric does, and suggests that the magnitude of the revenue surprise is a key ingredient to understanding the economic cycle.
All the data above suggests that there is a strong relationship between economic growth and the key measures of weekly revenue surprise used by AKAnomics in its work. Thus, AKAnomics Nowcasting can also serve as a strong barometer for global economic growth and slowdown on a weekly basis. Further, given the historical relationship between the AKAnomics signals and forward returns (see blog), our measures can provide investors with new fundamental signals towards market positioning.
*Rhea Pandit is a Summer Intern at AKAnomics Inc, and we thank her for her contributions. Rhea is an undergrad at Williams College.
**For the charts in this blog, we define the actual aggregate revenue growth is defined as the average of the quarterly Y/Y revenue growth across the US Industrials and Materials companies we track. The aggregate revenue growth estimate refers to the average of the quarterly Y/Y revenue growth estimated by AKAnomics Nowcasting across the same group of companies. Global industrial production index refers to the weighted average of the industrial production indexes from North America, Europe, and Asia created by the AKAnomics Nowcasting process, where the respective weights are 50%, 30%, and 20% respectively, and each regional index represents the measure for 3-month Y/Y growth. AKAnomics surprise index each week is the average of the AKAnomics Y/Y quarterly revenue growth estimate minus consensus, represented in multiples of each company’s historical standard error. AKAnomics beat minus miss index each week is the % of companies estimated to beat revenues minus the % of companies estimated to miss revenues, where the threshold for a beat/miss is 0.75 times the standard error for each company.
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