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European stock markets ignored the surprisingly positive business sentiment indicators published on Wednesday in France and Germany that would have cheered investors in more ordinary times. But that isn’t a sign that market operators have lost their bearings because of the coronavirus pandemic and associated lockdowns. Nor does it give an indication that investors remain pessimistic about the economy’s future, despite the gradual easing of restrictions throughout Europe.
Markets shrugging off the rosy confidence surveys may simply tell us something more basic: investors are finally learning how to navigate the treacherous roads of the current crisis, lined with misleading indicators that have, for now, lost their meanings.
That is especially true of surveys, based on interviews of business executives asked about their “sentiment” about the future of their companies and industries. Those, as could be expected, were skewed by the pessimism that took over Western economies as the pandemic spread and activity came to a halt. Symmetrically, they are distorted today by the optimism arising from the prospect that economies are coming out of their three-month torpor, as governments ease lockdowns.
And that supposes that people who usually fill in survey forms continue doing it. And it also supposes a lot of faith about their ability to see through this recession, which is like no other in history — forced by governments, triggered by political decisions the world over, and depending on political decisions for it all to end.
So the German Ifo business climate index may well have recorded its “strongest increase ever” in June, and in France the equivalent indicator may well “have recovered very sharply,” as it was put by the French statistical institute: In reality, this doesn’t tell us much about the real state of those economies, but it says a lot about the morale of the two countries’ business executives.
Furthermore, such indicators are often compared with what economists or analysts expected they would be. But those estimates themselves now vary in such broad ranges as to be rendered meaningless. “Describing a number as above or below consensus is not helpful. Economists — and markets — cannot be that precise about today’s world,” UBS chief economist Paul Donovan wrote.
Indicators can err both ways. Bank of America analyst Robert Wood noted that the reading of the U.K. purchasing managers index in June — a survey — seems to indicate that the economy is contracting, whereas it has almost certainly expanded. That is because “any qualitative survey, not just the PMI, will likely struggle to quantitatively capture what is going on now. We cannot be sure firms answer the question asked,” Wood wrote.
There will come a point when indicators really start indicating something, and executives fill in survey forms with seriousness, sobriety, and an accurate perception of where their business is headed. But that will take a few more weeks or months, and until then, such data better stay ignored.
