Bitcoin’s resurgence, AI’s ascent and the US dollar’s December slump

Inflation heats up in food and transportation as Fed policy shifts

What the chart shows

This heatmap visualizes US Consumer Price Index (CPI) inflation trends over the past year, broken down by key categories and subcategories. Using a colour gradient based on Z-scores, it highlights the relative intensity of price changes within each category. Darker shades of red signal higher inflation compared to historical observations, while blue denotes easing pressures.

Behind the data

In November, inflation rose to 2.7% year-over-year, continuing its upward trajectory since the Federal Reserve began cutting interest rates in September in response to cooling prices. Key drivers of this uptick were surging prices in food categories – particularly meats and non-alcoholic beverages – and increased costs for apparel and public transportation. While shelter remains a significant contributor to overall inflation, its rate of increase moderated slightly, declining from 4.9% in October to 4.7% in November. These shifts underline persistent price pressures despite recent monetary easing.  

Bitcoin tops asset class rankings again

What the chart shows

This chart highlights the annual performance of 14 distinct asset classes over the past decade, ranking them from best to worst for each year. Each asset class is represented by the same colour, making it easy to track trends over time. The percentage figures beneath each asset class indicate its total annual return for the respective year, providing a quantitative measure of performance. This chart helps investors identify performance patterns, spot resilient assets and assess long-term relative returns.

Behind the data

Bitcoin has emerged as the top-performing asset in 2024, driven by a surge following Trump’s election victory. True to its reputation as a volatile and “binary” asset, Bitcoin claimed either the top or bottom spot in annual rankings throughout the past decade – it was the worst performer in 2022. This year’s strong performance highlights its high-risk, high-reward nature, maintaining its appeal as a speculative and growth-focused investment.

Sector weight harmonization narrows US-Europe valuation gap

What the chart shows

This chart compares the 12-month forward price-to earnings (P/E) ratios of the MSCI Europe and US indices against their counterparts adjusted for harmonized sector weights, aligned to the sector composition of the S&P 500. The comparison is shown over time to highlight how sectoral differences influence valuation metrics. This underscores the importance of accounting for sector composition when assessing valuation spreads between regions.

Behind the data

The P/E ratio is a key leading indicator for investors, but aggregated comparisons can be misleading without considering regional characteristics. In this chart, the standard P/E spread between the US and Europe is nearly 10%. However, when sector weights are harmonized to align with the S&P 500, the spread narrows to 6.5%. This adjustment highlights how the higher weighting of high-valuation sectors in the US skews standard comparisons, offering a more nuanced view of relative valuations.

AI boom drives gains in key sectors

What the chart shows

This chart compares the S&P 500's 2024 year-to-date (YTD) performance, best YTD performance, and historical maximum drawdowns (DD) by industry group. The analysis is presented in two panes: one showing market-cap weighted results and the other showing equal-weighted results.

Behind the data

By the end of 2024, market-cap weighted indices reveal strong rallies in the communication services, IT and consumer discretionary sectors. These gains are driven by economic resilience and excitement surrounding AI advancements, which have concentrated returns within a few leading stocks in these cyclical sectors.

In contrast, the equal-weighted indices tell a different story. Here, financials, industrials and utilities demonstrate better overall performance, highlighting the benefits of diversification. The relatively lower returns in the equal-weighted analysis for the top-performing market-cap sectors suggest their dominance stems from the outsized influence of a few large-cap stocks rather than broad-based strength.

Looking forward, uncertainties from economic and political developments could necessitate a more decisive focus on selection and diversification strategies. Investors may need to balance exposure to high-performing, concentrated sectors with more broadly diversified investments to navigate potential volatility effectively.

China's market cap exhibits undervaluation amid persistent challenges

What the chart shows

This chart compares the market capitalization of the MSCI China Index relative to the MSCI All Country World Index (ACWI), the MSCI Emerging Markets (EM) Index, and the MSCI All Country Asia excluding Japan (AxJ), which represents EM Asia. Each pane illustrates these ratios from 2006 to 2024, set against pre-pandemic linear 95% confidence bands. This chart helps identify when China’s market cap deviates significantly from historical trends, offering insight into potential over- or under-valuation.

Behind the data

After the pandemic, China’s stock market capitalization surged to excessively high levels but has been significantly undervalued since 2022 due to economic and policy challenges.

Earlier stimulus measures were questionable, but recent signals from  President Xi – pledging stronger policy support at the latest Politburo meeting and reaffirming the 5% GDP growth target for 2024 – have reignited optimism.

Looking ahead, expectations include monetary easing, fiscal expansion and real estate stabilization to bolster equity markets. While pre-COVID trends suggest upside potential for China’s market cap relative to these indices, lingering economic risks such as deflationary and property market instability temper expectations.

Santa Claus rally leaves the US dollar weak in December

What the chart shows

This chart examines the seasonal patterns of the US Dollar Index (DXY) using two panes:

1.  The upper pane displays the average monthly returns (month-over-month percentage change) for each calendar month. This shows the average performance of the DXY for all instances of each month since 1967, such as all Januaries, Februaries and so on. Positive returns are shown in blue, while negative returns are shown in red.

2.  The lower pane illustrates the frequency of negative monthly returns for each calendar month. Each bar represents the percentage of years since 1967 in which the DXY recorded a negative return for that month. Months with negative returns occurring more than 50% of the time are emphasized in purple, providing a clear view of persistent downside risks.

Behind the data

December has historically been the weakest month for the US dollar due to seasonal factors, market behavior and year-end economic patterns. As our analysis reveals, more than 60% of Decembers since 1967 have recorded negative returns, with an average monthly decline of -0.8%.

This trend is largely driven by the "Santa Claus rally," during which investors reallocate funds into equities and riskier assets in anticipation of strong market performance in the new year. This shift away from the US dollar – a traditional safe-haven asset – adds to its seasonal weakness in December.

In contrast, January tends to mark a rebound for the US dollar, with an average increase of 0.9%. Notably, negative performance occurs in only 35% of Januaries, highlighting a more consistent upward trajectory at the start of the year.

Bitcoin halvings reveal diminishing returns as currency matures

What the chart shows

This chart illustrates Bitcoin's cumulative returns and daily mining changes during each halving period. Halving events, which occur roughly every four years (most recently in April 2024), reduce the mining reward by 50% for validating a new block on the blockchain.  These events are programmed into Bitcoin's code to control the supply of new coins, ensuring scarcity and mimicking the finite nature of precious metals like gold.

Behind the data

Bitcoin halvings are integral to preserving scarcity and promoting mining efficiency, but they also highlight a distinct pattern in cumulative returns. Historically, following halving, Bitcoin’s price surges for several months to more than a year, declines significantly, and then stabilizes at a level near the initial surge.

However, over the past three halving cycles, cumulative gross returns have steadily declined – from over 5,000% with a 202% compound annual growth rate (CAGR) during the first block, to around 700% with a 66% CAGR in the third. For the current cycle, which began in April 2024, the cumulative gross return stands at around 150% with a 90% CAGR. While the post-halving pattern suggests potential volatility and growth, the trend of diminishing returns underscores Bitcoin’s maturation as an asset.