U.S. financial markets entered a new era of good feelings in March on the back of sentiment surveys pointing to a rebound just around the corner, but hard economic data has yet to back it up.
Skeptics say investors have put too much faith in softer indicators, such as regional manufacturing indexes, purchasing manager surveys and consumer confidence numbers, pointing to green shoots of economic improvement to price in a V-shaped recovery.
Such a recovery depends on steady and rapid improvement after the economy's decline reaches bottom.
However, those surveys do not compare absolute figures -- retail sales from one month to another -- but measure the beliefs of respondents from one month to the next.
A lot of sentiment indicators are phrased in rate-of-change terms, said Michael Feroli, economist at JP Morgan. So we're getting better from very bad levels, but if you were talking in objective terms you might say 'very low.'
More concrete measures of activity like industrial production paint a different picture. Output is down 15 percent from December highs and fell 1.1 percent in May alone. The contraction is even more pronounced in exporting economies like Europe and Japan, suggesting the downward pressures are global -- and have yet to abate considerably.
Jobless claims, another indicator seen as pointing to recent improvement, are still too high to signal any sort of rebound in hiring.
Weekly claims for unemployment benefits have hovered near 600,000, having peaked at 674,000 at the end of March. Despite the decline, analysts say such levels are consistent with a continued rise in the U.S. unemployment rate, which in May climbed to a 26-year high of 9.4 percent.
Equities and corporate bonds have experienced historic rallies since March, but investors are now waiting for confirmation in corresponding hard data.
I don't know what it's going to take for the market to see that things aren't turning around that quick, said Warren Simpson, managing director at Stephens Capital Management. We certainly think we'll get some kind of correction.
Stocks are up a whopping 36 percent from their March lows, while the yield spread between Treasuries and highly rated corporate bonds has nearly halved, suggesting optimism about the economic outlook.
Equities got a further bump on Thursday when continuing joblessness claims experienced the largest one-week drop since November 2001. But markets may be allowing improving sentiment to color what hard data is available.
The optimistic outlook contributed to some people reading the decline in continuing claims as a good thing, but it could be the case that people are running out of benefits, said economist Kim Rupert, managing director of global fixed-income at Action Economics in San Francisco.
According to economists at Goldman Sachs, unemployed workers receiving benefits for more than 26 weeks are generally not included in the data on continuing claims. Given the extended drop in employment, ongoing claims could decrease despite ongoing increases in the number of unemployed workers, they wrote.
The labor market still remains quite weak, obviously the unemployment rate is quite high, and it's fated to continue higher, Rupert added.
The Philadelphia Federal Reserve's latest regional factory survey showed a big jump in activity during June, with the index surging to a nine-month high of -2.2.
Still, like the Institute for Supply Management's national factory report, it remains in contraction territory, and has failed to translate into a perceptible pick-up in factory orders.
People were looking at the ISM and PMIs, and usually when those bottom out, a month later, industrial production starts to recover. But the historical relationship has broken down, said Nouriel Roubini, president of RGE Monitor.
Roubini, an economist noted for his bearish outlook, believes equities may retreat to March lows, even if they do not drop below that level. He believes expectations are too optimistic.
My reading of the data is that in addition to these green shoots, there are plenty of yellow weeds, Roubini said.
(Additional reporting by Pedro Nicolaci da Costa; Editing by Kenneth Barry)