Charts of the Week

EMs offer superior growth

EMs offer better growth prospects than DMs, according to this analysis of Purchasing Managers’ Index (PMI) data. 

DMs have experienced significant challenges recently, with weakness in the eurozone and the UK and Japan falling into technical recession since the second half of last year.

By contrast, EMs have shown resilience in the face of global headwinds such as higher borrowing costs, worsening trade conditions and inflation.

However, various PMI indicators have exhibited different trends over the last two years. The Services PMI for EMs has consistently outperformed that of DMs. While DM Manufacturing was robust in January 2022, EM Manufacturing has taken the lead since last year. 

The Composite PMI for January 2024 also shows how EMs are outperforming DMs.

Inflation generally easing across EMs

Inflationary pressures are easing across EMs following a peak in response to the Ukraine conflict in March 2022. 

This is due to a combination of factors including lower commodity prices, the stabilization or strengthening of EM currencies against the US dollar and other major currencies, tighter monetary policy and more efficient supply chains.

A full three-quarters of EM economies posted lower headline Consumer Price Indices in January 2024 compared to the previous month. Major Asian and Latin American EMs are also experiencing inflation below their long-term trends.

Over the last four years, EMs have seen more inflation volatility than DMs for a number of reasons including pandemic-related supply disruptions and higher food prices.

EM equities appear undervalued

Now could be the time to buy EM stocks, with valuations looking attractive based on this analysis of MSCI indices’ relative forward price to earnings (P/E) ratios.  

Despite a more favorable growth outlook, EM equities continue to trade at a discount to their DM peers due to perceived risks, offering potential opportunities for investors seeking value. 

The current EM forward P/E ratio is at a greater discount relative to DM than the 30-year median, indicating potential underpricing.

However, it is worth noting that forward P/E ratios in EMs vary significantly by country. This is due to a range of factors including individual countries’ growth prospects, monetary policies and political stability. 

Financial stability is improving in EMs

EM companies are improving their financial stability, according to the Altman z-score. This is a formula for determining whether a company is heading for bankruptcy within the next two years by considering profitability, leverage, liquidity, solvency and activity ratios. 

The aggregate EM z-score is at 4.8, higher than the 4.3 average since 2006. Values look significantly better if considered for private non-manufacturing companies. 

Key factors affecting z-scores in EM include economic policies, external debt levels, commodity dependence and the impact of the Covid-19 pandemic.

Are commodities set to stabilize?

This chart shows the relationship between commodity prices and the US real interest rate, highlighting the inverse correlation between commodity returns and US interest rates. 

Low real interest rates reduce the costs of holding inventory and investing in commodities, making them more appealing to investors, thus increasing demand and prices. Such conditions often contribute to a weakening of the dollar, making commodities more affordable for holders of other currencies. This also makes yield-generating assets less attractive, prompting investors to explore alternatives, including commodities.

The chart shows that the US 10-year real yield turned positive from July 2023, with inflation decelerating. Commodity returns were negative during this period.

While a balance between growth-led demand and monetary easing, leading to lower yields, should help stabilize commodities, a range of risks could impact commodity returns. These include geopolitical risks, volatile shipping costs and uncertain weather conditions.

Contrasting inflation dynamics: US stagnation vs. European decline

From {{nofollow}}Jeffrey Kleintop, {{nofollow}}Charles Schwab.

In recent months, the inflation landscape has shown a stark contrast between the US and Europe. Since June 2023, the US Consumer Price Index (CPI) has stagnated, hovering just above the 3% mark, in notable contrast to Europe, where CPI has sharply decreased to below 3% over the same period.

The main driver of this disparity is the US's persistent service sector inflation, especially in housing, which is nearly double that of Europe. 

Conversely, in Europe, inflation across all major categories is on a downward trend, signaling a promising reduction in CPI. This decrease is likely to converge with the central bank’s 2% target at a faster rate than in the US. This may increase market confidence in the ECB’s capacity for earlier or more aggressive rate cuts.

This divergence in inflation dynamics highlights the differing economic challenges and policy responses across the Atlantic, with Europe appearing to be on a quicker path to meeting its inflation targets than the US.

How broad-based are price pressures in the UK?

From {{nofollow}}Investec.

Between Brexit, the pandemic and the war in Ukraine, it’s been a turbulent few years for the UK economy. Contrary to initial expectations, the inflationary surge has persisted.

The Bank of England initiated aggressive monetary tightening in December 2021 to mitigate excessive price pressures. This chart assesses the progress made towards achieving the 2% CPI inflation target by analyzing trends across 39 inflation sub-categories.

The Monetary Policy Committee is now in a period of pause as it assesses the impact of past hikes. The BoE has estimated that about a third of the impact of tighter policy is still to come.

As Investec’s chart shows, most of the components continue to record inflation rates above 2% (indicated by red bars), suggesting further efforts are needed before policy can be eased. Relatively few categories (indicated by blue bars) fall below the CPI target. CPI inflation itself is charted in light brown.

To date, a significant portion of the drop in inflation can be attributed to falling wholesale energy prices. While that should eventually feed through to other sectors, the BoE will likely want to see price pressures easing across the board, especially in services, before it can declare victory and begin to cut rates.

Deflation in China: global implications 

From {{nofollow}}Dr. Tariq Chaudhry and {{nofollow}}Norman Liebke, {{nofollow}}Hamburg Commercial Bank.

Weak Chinese inflation has both cyclical and structural roots, driven by three primary factors: 1) declining pork prices due to oversupply; 2) weak energy prices, notably oil, despite geopolitical tensions and OPEC cuts; and 3) the spread of deflation from goods to services, exacerbating labour market weakness.

This chart breaks down components of the CPI, showing their contributions to the overall deflationary trend, with a specific focus on the plunge in pork prices presented in a separate panel. It’s notable that despite overall deflation, core inflation remains positive, indicating that volatile food and energy prices are the principal drivers of deflationary pressures.

Deflation in China poses economic risks both domestically and internationally. Domestically, consumers and businesses may delay spending or investments, potentially triggering a vicious cycle of further economic slowdown.

Internationally, China’s economic softness could accelerate interest rate cuts in emerging markets reliant on Chinese goods and could provoke concerns in the West about competitive disadvantages stemming from more affordable Chinese exports.

Trouble in the Panama Canal and Red Sea: The Baltic Dry Index and knock-ons for inflation

From {{nofollow}}Tom Duncan, {{nofollow}}Cromwell Property Group.

The Baltic Dry Index tracks the cost of shipping raw materials around the world, including coal and metals.

“We monitor the BDI to take the temperature on global trade and supply-chain risk,” Tom writes. “Since December it has risen significantly and shown greater volatility, reflective of the drought impacting the Panama Canal, attacks on Red Sea shipping and heightened geopolitical uncertainty.”

“We expect the BDI to continue to rise, with knock-on implications for the availability and cost of goods, inflation and a focus by businesses on supply chain resilience through nearshoring and reshoring.”

Watching the S&P 500: What happens after record highs?

From {{nofollow}}James Maxwell and {{nofollow}}Alex Varner, {{nofollow}}Main Management.

Our authors chart the US benchmark, highlighting periods where it was within 5 percent of a record. “The S&P 500 hit a new all-time high in mid-January, breaching the high-water mark set at the beginning of 2022,” James and Alex write. “That two-year period is right in the middle of how much time it has historically taken bear markets to reach new all-time highs, at #6 out of the 11 most recent bear markets.” 

As the chart shows, the 2020 pandemic crash took just six months to reach new all-time highs, whereas the 2007 global financial crisis and 2000 dot-com bubble took 5.5 and 7.2 years, respectively.

“New market highs often raise questions about whether stocks are overvalued and if returns going forward will be lower as a result. However, if we look at the previously observed bear markets and what happens after record highs are hit, the momentum typically continues to bring the market even higher. In fact, the S&P 500 has spent nearly half the time (42%) within 5% of its all-time high since 1948.”

Applying the Taylor Rule to Fed policy

From {{nofollow}}Sebastien McMahon, iA Global Asset Management

The Taylor Rule is often seen as a rough guideline for assessing the appropriateness of central bank policy. This chart compares the Taylor Rule with the Fed’s key policy rate and the performance of equities.

“Effective monetary policy in 2024 requires a gradual transition towards neutral interest rates while ensuring clear communication to avoid detrimental market volatility,” Sebastien writes. “Investors remain vigilant in monitoring the Taylor Rule recommendations to anticipate changes in policy and improvements in unemployment and inflation. The peak of the Taylor Rule forecast in September 2023 coincided with a market rally, fueling a positive outlook on the economy's stabilization.”

“The current scenario is unique because the policy rate reduction could arise from an authentic soft landing that coincides with normalizing inflation instead of past instances when central banks felt compelled to ease rates due to a looming recession,” he continues. “Hence, the Fed might be able to sustain economic growth and limit the harmful effects of inflation with limited stimulation of growth. If central bankers start moving aggressively with cuts, then it’s highly unlikely that it’s because inflation has normalized without any significant economic damage.”

Equity risk premiums: US stocks seem unrewarding versus bonds

Stocks are supposed to be riskier than bonds in exchange for higher returns over time. However, in the US, that risk comes with less reward these days. With interest rates holding near the highest in almost two decades, portfolio allocation between bonds and stocks is more important than ever. 

This chart creates a simplified “equity risk premium” for US stocks: it subtracts the 10-year Treasury yield from the equity earnings yield. A negative reading (last experienced in 2002) means bonds in fact returned more than stocks.

We aren’t back there yet, but we are close. Last year, the risk premium dropped through its 2007 low, and we are barely above zero. 

Today, equity valuations remain high, and bond yields have risen significantly, limiting the excess returns investors can generate from stocks.

Equity risk premiums: China – an attractive entry point? 

The picture is quite different in China. The equity risk premium has surpassed 5 percent. Soon, it might be more than two standard deviations away from the average.

(Our charts use color-coding to denote standard-deviation ranges from the norm.)

As China loosens monetary policy while {{nofollow}}stock prices remain in the doldrums, the unpopular equities market appears to be at its most attractive entry point since 2008.

Speaking of 2008 (and 2007), note how the equity rate premium swings outside the two-standard-deviation range in both directions during and after the global financial crisis – showing the effect that a crash, crisis-fighting rate cuts and the first stages of recovery can have on this measure.

Equity risk premiums: Brazil – a different world

Like China, Brazil also appears to offer an attractive entry point for stocks. The equity risk premium has wavered near a multi-decade high since 2019. 

What’s notable is how different the average ERP is for Brazil over the past 22 years: negative 2 percent, versus positive 3 percent in the US. Bonds are historically more attractive than stocks given the risks.

As inflation has historically been much higher in Brazil, so have 10-year government bond yields. But in recent years, equity earnings yields have improved markedly.

Business confidence clocks: German doldrums

Our second trio of charts use the “business cycle clock” visualization, which tracks an economy through expansion, downswing, contraction and upswing phases. 

They rely on the results of local surveys of executive sentiment, plotting a month-on-month trajectory using two variables: month-on-month change (the X axis) and the Z-score, i.e. the latest reading’s statistical divergence from the three-year average (the Y axis). 

Business confidence in Germany remains in the doldrums, as this “clock” shows. We’ve broken down Europe’s largest economy into services, consumer, construction, industrial and retail sectors for greater granularity.

All sectors are in contraction. The consumer sector was in an upswing, but that just ended. A potential retail recovery stalled in mid-2023.

Business confidence clocks: Mostly optimism in Spain

This trio of charts also focuses on the eurozone, demonstrating the challenge of running a single monetary policy for divergent economies. 

Even after the 2022-23 run of rate hikes, Spain’s “clock” looks quite healthy by comparison to Germany.

The consumer sector is an outlier, much weaker historically than its peers and heading from upswing to contraction. Services and industrial sectors are expanding. Construction and retail are only just in downswing territory. 

Business confidence clocks: a mixed picture in Italy

Our Italian “clock” is notable for how dispersed the various business sectors are, as opposed to the more uniform trends in Germany and Spain.

Retail and construction business confidence remain high in absolute terms, though both are straddling the line between expansion and downturn. Services confidence is right on the historic average, with little change month-on-month. And the industrial sector is in the grip of sustained deterioration. The consumer sector had recovered from a much worse downturn than the other sectors, but its recovery is stalling.

The UK: stagnant, but improving?

Recession pressure: 60% 

One of the steepest, fastest and most globally synchronized monetary tightening cycles in history has come to an end. (Or so it seems.) Will a global recession be the result?

Compared with the middle of last year, prospects for a recession in Britain seem to be receding. 

However, the economy remains in rather morose state, with a prevalence of red and yellow cells in the most recent columns of our dashboard. 

(The “heat-mapping” of all figures in these dashboards tracks their deviations from decades of historic data.)

We last calculated a recession pressure indicator in December. As the January indicators trickle in, job growth and business confidence are improving. Some indicators, like housing, are benefiting from a shift from dark red to “pink.”

Germany: danger zone

Recession pressure: 87% 

Germany’s economy has suffered for some time from the disruption of its industrial model, which relied on expanding globalization and cheap energy from Russia. 

As the trajectory of our recession indicator shows, its economic indicators are getting even worse. On Jan. 30, the national statistics office said {{nofollow}}the economy indeed shrank in the final three months of 2023, though {{nofollow}}revisions mean Germany narrowly avoided a technical recession (two consecutive quarters of contraction).

Most of our dashboard is flashing red, with a measure of cargo shipping the only recent bright spot. New orders, inflation and capacity utilization remain problematic. Data trickling in for January is showing a worsening job market and receding business confidence.

Australia: still lucky

Recession pressure: 43%

Resource-rich Australia is famous for having avoided recession in the 30 years between the early 1990s and the pandemic. Even its {{nofollow}}Covid-19 downturn was less severe than those of its peers in developed markets.

According to our dashboard, the nation looks set to remain the “lucky country” versus the rest of the economies we examined. 

While consumer confidence remains weak, optimistic trends in the stock market, a robust labor market and healthy terms of trade for the nation’s critical commodity exports have pushed chances of recession down. 

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South Korea: a semiconductor bright spot

Recession pressure: 75%

South Korea’s recession pressure level is elevated relative to several Asian peers. The export-driven economy has suffered amid weakness in its key Chinese market. Business confidence and e-commerce indicators have been worsening. 

Still, things have improved since early 2023, when our indicator surpassed 90% and a recession seemed certain. The key semiconductor industry is also worth watching; it recently tipped into green on our dashboard. 

Japan: rising sun, blue skies

Recession pressure: 50%

Japan’s economy is a global outlier: its central bank is expected to raise rates, and it’s chasing a positive wage-price spiral. 

Corporate credit indicators are in good shape, and consumer confidence is improving. New orders and capacity utilization remain relatively weak. ‍

China: a mixed picture

Recession pressure: 64% 

China’s dashboard offers a striking contrast of some bright green and more red. 

The labor market is improving. And we’ve previously pointed out the nation’s healthy OECD leading indicator, a data point whose components include early-stage production – though that has now weakened for January. 

Negative signals are coming from household credit and confidence measures for consumers and small business. And even after a series of crises in the property market, the residential housing price index continues to deteriorate.

Brazil: unexpected growth

Recession pressure: 47% 

Returning Brazilian President Lula has had good economic news since he took office. December figures showed the economy unexpectedly grew in the third quarter.

Our recession gauge has steadily receded over the past year, and the dashboard looks a lot like the national soccer jersey lately, showing mostly green and yellow cells for December and January. The OECD leading indicator and manufacturing figures are historically healthy.

Canada: resource pressure, worried consumers

Recession pressure: 82% 

The economies of Canada and the US are closely intertwined, but our dashboard has been suggesting for a year that the Great White North is much likelier to stumble into recession.

While employment and inflation trends seem positive, consumer confidence remains in the doldrums. Business confidence is in the red, receiving only a small uplift from the positive economic figures south of the border recently. 

Meanwhile, Canada’s key resource sector is under growing pressure: the “commodity terms of trade” indicator (compiled by Citigroup) slid from positive into neutral territory over the three most recent readings.

The US revisited: pondering a soft landing

Recession pressure: 71% 

We wrap up this chart pack by revisiting our US dashboard. Compared with two weeks ago, new and revised data has given us a more complete picture. Our recession indicator for December has crept somewhat higher (from 60%). 

Is a recession inevitable, or will Fed Chair Jay Powell pull off his coveted soft landing? Or, a third possibility: will continued robust inflationary growth after all these rate hikes wrong-foot the markets and central bankers?

As we noted in January, some leading economic and financial indicators (such as the NFIB’s small-business confidence index) seem to have bottomed out earlier in 2023, bolstering the case for a soft landing. 

Data trickling in for January has been positive overall versus historic norms: unemployment, consumer confidence, even truck sales.

However, the inverted yield curve, a classic recession indicator, is still flashing bright red – especially after Chair Powell downplayed rate-cut prospects.

Hawkish and dovish central banks – and the one-size-fits-all ECB dilemma

Rate cuts are priced in around the world this year. However, there has been some recent pushback on those expectations: {{nofollow}}Jerome Powell suggested Fed watchers shouldn’t expect a cut in March.

‍This chart assesses the relative hawkishness of various central banks by taking their key interest rate and subtracting core inflation to get a sense of their “real” policy stance. In the case of the UK and Australia, inflation and the policy rate match: a true neutral stance.

The presence of Latin American countries on the left-hand side is notable. Last year, we named Brazil and Mexico as “early hikers:” their central banks have had more history of steeply raising rates to fight inflation in recent decades than their developed-market peers.

However, green bars don’t just reflect tough policy: they can be a consequence of speedily cooling inflation, as seems to be the case for Canada and India.

Unsurprisingly, Japan is at the right-hand side of the chart: still running a negative interest-rate policy even as price increases pick up, as the central bank awaits a “virtuous” wage-price spiral.

Ireland and Finland are also notable due to their elevated inflation, showing the challenges of the European Central Bank’s one-size-fits-all monetary policy for 20 countries.

Emerging market fund flows rediscover China

This chart requires a subscription to the EPFR Fund Flow add-on database.

Stock markets in {{nofollow}}mainland China and Hong Kong have been slumping to multi-year lows.

However, equity fund flows into China have spiked higher lately, with asset managers perhaps lured by cheap valuations.

Data from {{nofollow}}EPFR is showing that weekly fund flows into emerging-market equities have picked up. As the spike in our chart shows, they reached a {{nofollow}}multi-year high of USD 12.5 billion in the week through Jan. 24. The inflows fell off somewhat last week, but are still high when compared to the last two years.

As the top pane of our chart shows, this can be broken down to show how that entire gain is headed to Asian equities – especially China.

The second panel shows how institutional investors account for all of that influx: retail investors are, in fact, pulling their money.

China’s property woes continue

The difficulties in China’s property market continue. The most recent development is the {{nofollow}}liquidation order from a Hong Kong court received by former mega-developer Evergrande. China is unveiling {{nofollow}}support measures as a result.

This chart visualizes Chinese housing diffusion indices we created for new and existing homes, incorporating month-on-month changes in primary and secondary residential prices for 70 major cities. A reading of 50 indicates prices were unchanged.

The index for existing homes just touched zero for the first time since 2014; the new housing measure is not far behind.

When the rate drops, stocks can have a delayed reaction

As Mr. Powell indicates he won’t hurry towards a policy pivot, this “mixing board” chart analyzes history for a sense of what might await US stock investors when they finally get a rate cut.

It measures the response by the S&P 500 three, six and 12 months after the first rate cut in various cycles. Interestingly, the initial response is often not that positive; this was especially the case in the high-inflation 1970s and early 1980s.

After six months, most cycles saw improved performance. And after a year, the gains were usually quite strong: only the post-1989 and post-1974 cycles saw truly weak markets.

Nations fight corruption perceptions while others backslide

Transparency International recently released its Corruption Perceptions Index for 2023. It examines perceived levels of public-sector malfeasance for more than 180 countries, scoring them on a scale of 0 (highly corrupt) to 100 (very clean).

Our dashboard identifies two lists of 20 countries: those that made the greatest progress fighting corruption, and those perceived to be backsliding the most. 

By absolute corruption score, Egypt and Zambia remain in the bottom half of the world’s nations. But the two countries made the most relative progress, advancing by 22 and 18 places respectively. ({{nofollow}}Egypt has made up ground that it lost last year. Zambia, meanwhile, saw the {{nofollow}}arrest of a former president’s son on corruption charges in 2023, as well as an incident that prompted {{nofollow}}the resignation of its foreign minister.)

The US pivot to gas (and, slowly, renewables)

This chart uses data from the Energy Information Administration to break down all of the energy produced in America, whether it’s consumed domestically or exported. 

Our visualisation shows how the shale revolution transformed the US energy mix. From 2005, {{nofollow}}natural-gas production rose for 10 straight years, making the US the world’s biggest producer. (And in the wake of the Russia-Ukraine war, US gas producers now have a lucrative European market for liquefied exports.)

Shale drilling also made the US the world’s largest oil producer. Since the “peak oil” worries in the mid-2000s, crude has regained the share of US energy production that it had in the early 1980s.

The other key trend is climate-friendly: the decline of coal. In 2008, it represented 33% of American energy production. By last year, that figure had shrunk to 11%. Net Zero campaigners might also appreciate the steadily rising share of renewables, which is approaching 10%.

Despite the renewed, climate-driven wave of enthusiasm for nuclear power, its proportion of the national energy mix has shrunk somewhat since the 2000s. 

The intricate dance between rate moves and equities

‍‍Lower interest rates are broadly perceived as good for stocks: stimulus for the economy and an implication that inflation is under control should be good for corporate earnings. But the relationship is intricate.

This chart expresses the relationship between Federal Reserve hikes and cuts since 1970 and the S&P 500 performance that preceded every move by the central bank – as expressed by the bubble size and colour.

The pre- and post-2000 environments look strikingly different. Not only were rates much higher, but there were fewer outsized market moves. The preponderance of green in the 1980s and 1990s reflects long bull markets, interrupted by the large red bubble of the 1987 crash.

Post-2000, what’s most visible is the gap – seven years that rates spent at zero between 2008 and 2015 – and two large green bubbles. Very sharp gains preceded the Fed’s moves to slash rates to nothing during the GFC and the pandemic, suggesting the market was pricing in the Fed’s hyper-stimulative response to crisis.

A recession dashboard to fact-check prospects for a soft landing

{{nofollow}}“It won’t be a recession; it will just feel like one,” the Wall Street Journal wrote this month. But downside risks shouldn’t be overlooked.

We created a dashboard that tracks 19 variables and then compiles our own “recession pressure” gauge. It assesses macroeconomic indicators from labour to house prices and adds important signals from the financial markets, such as the yield-curve slope and S&P 500 forward earnings-per-share growth. Finally, we “heat-mapped” all figures by tracking their Z-scores, or standard deviations, to create percentile ranges based on decades of historic data.

There was generally more red on our dashboard in 2023 than there was in 2022. But it’s notable that some leading economic and financial indicators seem to have bottomed out, bolstering the case that Jay Powell is pulling off a soft landing.

The NFIB small-business lobby’s optimism index and the OECD leading indicator are starting to recover, while new orders PMI held steady in 2023.

Equity investors’ dash for growth

The stock market’s gains have been narrow – a theme we have revisited several times. The biggest gains have been concentrated in a small number of tech stocks.

This chart takes another look at this theme by breaking down 2023 market performance between investment styles, as defined by MSCI. The “growth stocks” strategy – {{nofollow}}defined as equities whose earnings are expected to grow more rapidly than the rest of the market – was the clear outperformer.

(Indeed, MSCI’s breakdown of the biggest components in its World Growth Index reveals some familiar names:  Apple, Microsoft, Amazon and Nvidia.)

Momentum, dividend-yield, minimum-volatility and value strategies all underperformed our benchmark (the MSCI mid- and large-cap index).

A “clock” for Asia’s real-estate cycle

Commercial real estate’s headwinds are well known: the rise of remote work was followed by the highest interest rates in decades, constraining spreads between real estate yields ({{nofollow}}REIT dividend yields or {{nofollow}}commercial real estate cap rates) and bond yields. However, everything goes in cycles. CBRE recently said it expects {{nofollow}}CRE investment activity in Asia should recover by mid-2024, led by Singapore.

To explore this cycle, we created a “clock” tracking the new orders purchasing managers index (PMI) – the gauge of executives’ sentiment – for the real-estate industry in Asia. PMI of 50 equals neutral sentiment.

We tracked both the PMI reading for each moment in time and its rate of change, placing each month in a quadrant. “Slowdown,” for instance, reflects a positive (50-plus) sentiment reading that has come down from a month earlier. “Recovery” is negative (less than 50) sentiment that has improved from the previous month, and so on.

For each quadrant – recovery, expansion, slowdown and contraction – we then posted the average performance by S&P’s Asia-Pacific Ex-Japan REIT. Unsurprisingly, “expansion” was correlated with the best returns. The gray line follows the deep pessimism through the worst of 2020, followed by a weak expansion in 2021 and more pessimism in 2022. Switching to dark blue, the 2023 cycle was in more positive territory.

Equities shrug off Fed hiking cycles

This chart looks at the S&P 500’s price return over the last 11 Federal Reserve tightening cycles. We’ve identified the days that the central bank made its final hike, allowing us to slice 50 years of market history into different regimes.

While the lower pane presents this performance in a “normal” index manner on the Y axis, the upper pane displays the S&P 500 on a logarithmic scale. That’s useful for a better sense of long-term performance, given how lower early absolute values in the bottom pane compress the visualisation.

Over the last 10 hiking cycles (excluding the current cycle, assuming Jay Powell’s July rate increase was indeed the last), the S&P 500 has posted an advance within 12 months of the final hike. (The GFC took more than a year to really kick in after the final hike of 2006.)

China's declining population

The Chinese National Bureau of Statistics recently released annual demographic figures, showing that the nation’s population shrunk for a second straight year. Before 2022, that hadn’t happened since the 1960s.

The global decline in birth rates is a potential headwind for many economies and social-security systems, and China is seeing a particularly dramatic change. In 2016, there were nearly 19 million births; in 2023, that number dropped to just 9 million.

Watching payment-card use to gauge US consumer confidence

Visa, the payment-card giant, provides us with a Spending Momentum Index. This breaks down spending on necessities versus “discretionary spending,” i.e. non-essential expenses like restaurants, entertainment and subscriptions.

If the ratio of discretionary to non-discretionary spending is above 1, it indicates that Americans are relatively confident about their economic situation. When the ratio falls below 1, consumers are cutting back, using their cards for basic needs, i.e. “non-discretionary” goods and services.

The effect of Covid-19 in our chart is obvious: spending on perceived luxuries ground to a halt in 2020. Pent-up pandemic demand for discretionary items was released in a surge during 2021.

As we assess prospects for a soft landing, the ratio is shrinking towards 1 again, suggesting that consumers are tightening their belts.