Charts of the Week

A century in stocks

What counts as a “typical” year for the S&P 500? Luckily, we have 96 years of data to help us find answers.

In this chart, we bracket annual returns into 10-percentage-point ranges. Many of the outliers came during the Great Depression: punishing declines in 1930, 1931, and 1937 were intertwined with massive bear-market rallies in 1933 and 1935.

Conventional wisdom suggests that equities outperform in the long run, and that argument is bolstered by the plurality of years in the 10-20 percent and 20-30 percent gain brackets.

We also colour-coded each year, starting with 2024 as the darkest blue and implementing a gradual fade as we go back in time, to give a sense of how recent years compare to the historic distribution. The last 20 years are more or less in the centre of our chart, with the 2008 bear market the only outlier.

Market sentiment is decidedly greedy

{{nofollow}}CNN Business developed a Fear & Greed Index to evaluate investor sentiment and analyse the influence of emotion on markets. We recreated it here using data from S&P, the CBOE and the Fed.

This chart offers a historical perspective on five out of the seven Fear & Greed indicators: stock price momentum (as defined by the S&P 500 versus its 125-day moving average), the five-day ratio of put to call options, market volatility (the VIX), junk bond demand (the spread over investment grade), and safe haven demand (as measured by short-term bond outperformance versus stocks).

We generate Z-scores (divergence from the norm, as measured by standard deviations) for each indicator in this chart.

After some positive inflation numbers recently and dovish statements from the Fed, the market has been “greedy” since November.

US budget deficits: higher for longer

This chart displays the International Monetary Fund’s projection of national budget deficits as a percentage of GDP. Sustained deficits are the order of the day, which is concerning given the era of ultra-low interest rates has ended. With the late 2020s in sight, governments are facing the challenges of aging populations, declining tax bases and the hangover from pandemic stimulus spending.

The Germans are on track for the smallest deficits; the French, Italians and Japanese – known for their high overall debt burdens – are projected to make progress closing their budget gaps.

The US and China stand out both for their very wide deficits and how little progress is expected.

The US can traditionally run such large deficits more easily than other countries due to the dollar’s status as the international reserve currency and global demand for ultra-liquid Treasuries. Still, Standard Chartered boss Bill Winters warned this week that {{nofollow}}a “buyer’s strike” for US debt is still possible without some fiscal retrenchment.

“There is very little sign of fiscal discipline from either party right now,” the US-born banker said in Davos.

As for China, despite its recent economic challenges, the nation is expected to post much faster GDP growth than the US, making its deficit more bearable.

Trouble in the skies at Boeing

Boeing is back in the news. On Jan. 5, {{nofollow}} a months-old Alaska Airlines 737 Max 9 jet suffered a mid-air door blowout.

Macrobond’s fundamental corporate data includes time series on Boeing’s backlog and deliveries. This chart tracks the plane maker’s orders over the last 15 years showing the profound effect of previous safety concerns.

As we can see, the two deadly 737 Max crashes in 2018-19 sent demand tumbling well before the pandemic crushed the travel industry.

Aircraft orders had been on the rise for Boeing, recently exceeding the previous peak in 2018.

Japanese consumers take stock of inflation

‍The Bank of Japan holds its next monetary policy meeting on Jan. 23. It has been seeking sustained inflation, driven by a positive wage-price spiral, before it ends the world’s last negative interest rate policy (NIRP) – as is widely expected this year.

To explore the inflation outlook in Japan, Macrobond offers high-frequency data from Macromill– which surveys consumers weekly for their price expectations in two to three months’ time.

Our chart tracks a weighted average for this price perception (the blue line, as measured on the left-hand axis) and breaks down the percentage of respondents expecting higher or lower inflation.

The earliest survey data for 2024 shows a continuation of the somewhat disinflationary trend that began in August. {{nofollow}}That could be fodder for a continued cautious stance by the BOJ.

Still, three-quarters of Japanese consumers expect inflation – compared with less than half at the start of 2021.

Chinese producer inflation and its link to shipping rates

Spiking shipping rates are in focus amid {{nofollow}}attacks on container vessels in the Red Sea.

This visualisation tracks the Shanghai Export Containerized Freight Index (SCFI), which tracks ocean freight rates for importing goods from China. We’ve pushed SCFI forward by 21 weeks to show its leading-indicator relationship with Chinese producer price inflation.

Should PPI continue to follow this relationship and spike higher, it would be at odds with the {{nofollow}}deflationary trend in China and would also have implications for the global disinflationary narrative, given the global importance of Chinese trade.

Half a decade of stagnation in Peru

Peru was viewed as one of Latin America’s more successful economies over the past 30 years; average per capita economic growth was 4.5 percent from 2002 to 2016.

But {{nofollow}}political turmoil and lingering aftershocks from the pandemic have hit the economy hard of late. Market expectations suggest the {{nofollow}}recent run of stagnation won’t solve itself soon.

This chart tracks a monthly macroeconomic survey from the nation’s central bank, which tracks expectations over the next 3 months. The survey has expressed a pessimistic outlook (<50) for almost three years.

The sluggish 2020s extend a multi-decade plateau in global growth

We’ve entered the fifth year of the 2020s, so it’s not too early to start thinking about decade-on-decade economic comparisons. 

This chart uses data from the World Bank and International Monetary Fund to compile global GDP growth rates from 1960. The coloured stripes represent the mean growth rate for each decade. 

Even as the post-Covid snapback led to the quickest growth since the 1970s, the lingering damage from the pandemic makes the 2020s the weakest decade on our chart.

Interestingly, the 1990s, a golden era for the American economy, were only slightly better than the 2020s on a global basis. This could reflect the depth of the contraction in post-Soviet and other post-Communist states. China, meanwhile, had already started to grow quickly, but from a much lower share of global wealth than it has today.‍

Turkey’s inflation problem spreads across the economy

Disinflation might be taking hold in much of the world, but not in Turkey. 

 The central bank has spent half a year unwinding the unconventional interest-rate policies formerly espoused by President Erdogan, but inflation has only become worse – ending 2023 {{nofollow}}at a whopping 65.7 percent. Meanwhile, the currency is sliding to more record lows.

This inflation heat map shows all sectors in various shades of red for December, indicating that they are exceeding their 12-month average. Education, hospitality and transport experienced some of the most significant inflationary pressures. Last month, housing became the last relatively “cool” category to go.  ‍

It's a historically uncommon moment for the Fed to end rate hikes

Unemployment versus inflation is the classic central-banking tradeoff. Therefore, it’s historically unusual, though not unknown, for the Federal Reserve to stop tightening policy when inflation remains higher than the unemployment rate.

The moments in time on this scatterplot represent the final rate hikes in Fed cycles going back to 1957. Data points below the dotted line show moments when unemployment exceeded the inflation rate at the time.

Just four cycles are on the other side of the line – all in the inflationary 1969-81 era bookended by Paul Volcker’s crushing interest-rate hikes.

Today, we are again north of the dotted line, but just barely. US unemployment stands at 3.7 percent, while inflation, as defined by the change in the year-on-year core consumer price index, is 4 percent. Jerome Powell is hoping to land a disinflationary soft landing; {{nofollow}}his critics charge that he risks repeating the mistakes of the 1970s by halting rate increases (as the market assumes he has) before inflation has truly been crushed.

Short, sharp recessions vs. long depressions, before and after WWII

The National Bureau of Economic Research is viewed as having the official word on whether the US is in recession. The NBER also has data on business cycles going back to the Civil War, allowing us to examine very long-term trends.

As the red strips in this chart show, long-lasting recessions were quite frequent – indeed, almost more of a norm than economic growth – before World War II. The Great Depression was not unique; the {{nofollow}}“Long Depression” of the 1870s, known for gradual, post-bubble deflation rather than the misery of the 1930s, is clearly visible.

Since the late 1930s, the pattern has changed completely; expansion is the norm, interrupted by recessions that seldom last more than a year. Economists often attribute this to the {{nofollow}}abandonment of the gold standard, allowing policymakers much more leeway to stimulate the economy (and create inflation).

President Biden falls behind Trump’s approval-rating trend – again

This chart tracks the progress of {{nofollow}}approval ratings for Presidents Trump and Biden as compiled by FiveThirtyEight, the website founded by pollster Nate Silver.

Donald Trump is notable for his quick descent into unpopularity, followed by a slow rebound from the second year of his presidency as the economy kept growing. Still, his approval rating never truly approached 50 percent.

Joe Biden took office with considerably more enthusiasm from the electorate, only to see his rating deflate as the pandemic wound down and inflation kicked in. He has fallen below Trump’s approval rating at the same point in his presidential term several times.

With the current president not far off his lowest approval rating, {{nofollow}}the Democratic Party remains concerned that his predecessor might also be elected as his successor later this year.

Two weeks into 2024, markets expect a smaller “pivot” in Europe

This chart visualises the progression of futures-market expectations for action by the Federal Reserve, European Central Bank and Bank of England this year.

It’s notable how the gap between perceptions of the different central banks closed over the course of 2023. Last summer, markets were betting on a sharp Fed pivot but tighter policy for longer in the UK and Europe. Fed and ECB expectations converged in September, and then moved in unison back towards a more severe pivot.

By the end of 2023, the markets were expecting the same outcome for all three central banks: six rate cuts. However, as of Jan. 12, expectations had been trimmed to “only” about five cuts for the ECB and BoE.

Expectations for the Fed were following suit after unexpectedly strong {{nofollow}}US nonfarm payrolls, but futures markets were back to predicting six cuts at the time of our publication.

Earnings forecasts by sector are diverging the most in decades

It would seem obvious that the pandemic was a boon to some industries and inflicted serious damage on others. This chart provides evidence for that assertion by tracking how analysts’ earnings estimates for different sectors have diverged.

This chart uses historic data on developed-market earnings-per-share estimates from FactSet to calculate this dispersion, i.e. cross-sector standard deviations.

The coloured lines track the median dispersion in different “eras” over the past 30 years: Alan Greenspan’s “irrational exuberance” 1990s, the post 9/11-post-dot-com 2000s, and the years that followed the global financial crisis.

Variability between sectors has been dramatically higher since 2020.

Jan. 27: The markets’ call on rate peaks proved to be somewhat too low

First featured in Charts of the Week on Jan. 27.

At the start of 2023, inflation was still running hot. But many observers were confident that central banks had cooled their economies so much that rate hikes surely couldn’t continue for much longer.

Where would rates top out? This chart tapped the futures markets to track the changes to the forecast peak rate (rather than project a rate curve) for the Federal Reserve, the Bank of England and the European Central Bank.

Ultimately, the futures markets were too dovish. As our chart flattened at the end of 2022, terminal rates were predicted at 4.91 percent, 4.42 percent, and 3.35 percent for the Fed, BoE, and ECB respectively in January of 2023.

But there was another leg higher as inflation persisted in mid-2023. By the end of the year, as our updated chart shows, the terminal rates had adjusted to 5.33 percent, 5.21 percent, and 3.90 percent respectively.

(With Chair Powell almost certainly finished raising rates this cycle, the Fed funds rate was kept at 5.25-5.5 percent for a third straight meeting in December; the market settled on its correct prediction of that outcome in mid-summer.)

A reopening index for China

First featured in Charts of the Week on March 3.

China dismantled its “zero Covid” restrictions at the end of 2022, and as the new year began, there was optimism about Asia’s biggest economy roaring to life.

In March, we built a composite index aiming to capture what economic “reopening” actually means. It used a broad range of daily alternative datasets, including port activity, road congestion, subway use, movie-going and international flights. The chart expressed this composite index in the form of a z-score, or deviation from the historic mean.

The snap-back at the start of 2023 is clearly visible (as is the extent of the plunge in early 2020).

Interestingly, box office revenues and port congestion stayed below the historic mean through most of last year.

Housing slides in Germany, plateaus in Canada, but US resumes records

First featured in Charts of the Week on March 31.

By early 2023, the transmission mechanism of monetary policy meant higher rates were making mortgages more expensive. In March, we created a chart tracking home prices before and after their peaks.

Germany and New Zealand were notable for earlier peaks than other countries and substantial declines; Prices in Canada and Norway had barely budged after peaking just six months earlier. The US was somewhere in between.

Fast forward to the present moment: we expanded our chart’s time horizon to 30 months pre- and post-peak for all nations. The US has “reset” to the centre of the chart – i.e., {{nofollow}}it’s setting new highs again. New Zealand and the Netherlands are recovering; Germany, not so much. And Canada and Norway have still barely budged from their flat line.

Stock sectors’ relationship to the PMI

First featured in Charts of the Week on April 14.

In 2023, we repeatedly revisited the Institute for Supply Management’s purchasing managers index, a key indicator that surveys manufacturing sentiment.

Last spring, we examined its relationship with the stock market. We analysed 40 years of data to create PMI “regimes” for perceptions that the economy was expanding, slowing, contracting or rebounding. We then tracked how different S&P 500 sectors performed in each “regime.”

In April, PMI had worsened to 46.3, representing a fifth straight month of contraction. In a contraction regime, it tends to be best to own health care or tech – as the right-hand column indicates.

Since then, three more “contractionary” prints were released, along with five prints indicating a “rebound,” the column we are in today – barely – with a 47.4 reading. In this environment, the materials and IT sectors have historically outperformed the most; utilities and, especially, real estate tend to underperform.

The market rally was reliant on a few big stocks – but broadened, a bit

First featured in Charts of the Week on May 5.

The “narrow” nature of this year’s equity gains were a perennial market theme as {{nofollow}}investors piled into stocks associated with artificial intelligence, like Nvidia and Microsoft.

In May, our chart broke down the year-to-date gains of the S&P 500 by separating the 10 stocks with the largest market capitalisations from the rest. Indeed, as this chart still shows, the “Big 10” were responsible for the entirety of the market rally at the time – especially after bank failures in March dented confidence outside the world of tech.

Revisiting this chart at year-end, the Big 10 were still responsible for the majority of the gains – but the market had finally broadened, and the “Smaller 490” posted an 8 percent advance for 2023.

Equities defy their usual correlation with central bank balance sheets

‍First featured in Charts of the Week on June 9. 

In February, we examined a mystery: Japan’s unorthodox monetary policy seemed to be helping global equity markets, offsetting the Fed’s tightening cycle. We followed this up with a broader analysis in June.

This regression model indicated that there was a 96 percent historic correlation between the combined balance sheets of the world’s major central banks and the performance of the S&P 500.

However, in June, this correlation was breaking down; we questioned if a correction was overdue as central banks drained liquidity, or whether markets would defy shrinking balance sheets as they did during the tech-driven surge of 2018-19. 

Today, with markets assuming rate cuts and a soft landing are coming soon, the answer seems to be the latter. As the second pane of our chart shows, the model suggests the S&P 500 is steadily levitating away from what would normally be considered fair value.

Borrowing behaviour in China

First featured in Charts of the Week on June 23.

As concern about China’s economy grew mid-year, we published a chart on domestic credit growth in June, breaking it down into loan demand from non-banking financial institutions, non-financial enterprises and households.

The swath of orange-coloured bars starting in early 2022 indicated that household loans had been shrinking, something rarely seen over the past half-decade. This bifurcation with rising private-sector credit formed part of the broader context for China’s rate cuts in mid-2023.

At the end of 2023, the consumer appears to have been in better shape; credit demand had stopped shrinking on a cumulative, year-on-year basis.

Futures markets take on the Fed pivot …

First featured in Charts of the Week on Sept. 1.

This visualisation calculates both the Fed’s implied future policy rate and the implied number of hikes and cuts, as demonstrated on the double Y axes.

Our chart looks quite different than it did in September, when a December hike was still considered a possibility, a pivot was foreseen for late spring 2024 and we were only looking as far as January 2025.

Remarkably, markets are now projecting rate cuts in a steady line through 2025, reaching 3.5 percent by June. Meanwhile, markets think the true ”pivot” to the first cut could come as early as February. While Powell switched to a dovish rhetorical stance in mid-December, he has still suggested that the market must wait until later in 2024 for looser policy.‍

… And then turn their attention to the ECB

First featured in Charts of the Week on Sept. 15.

This chart applies the equivalent of the Fed futures analysis to its European counterpart. In short, both central banks are expected to cut steadily, but the ECB will bottom out at a lower level in mid-2025.

In a split decision in September, the ECB lifted its key interest rate to 4 percent, the highest level since its creation. With a simultaneous lowering of growth projections, the move was interpreted as a “dovish hike.” Still, some participants were still expecting one more rate hike.

This chart has also changed significantly. Today, the consensus view is that cuts are over; the key rate is expected to sink to 3 percent by September 2024, instead of January 2025 as was predicted less than four months ago.

Markets declare the definitive end of global tightening

First featured in Charts of the Week on Dec. 1.

This chart looks pretty much the same as it did at the start of December. For most of the major central banks, futures markets expect rate cuts to kick in from about April. Australia looks to be cutting rates more slowly than its peers; Japan is a far greater outlier, leaving its negative interest rate policy behind and probably moving into positive territory in the autumn.

However, the Federal Reserve’s rhetoric has changed markedly in the month since this chart was published. Jerome Powell’s dovish remarks on Dec. 13 could be interpreted as the Fed chairman catching up with our chart.

Jan. 13: Our bearish “nowcasts” for US GDP

First featured in Charts of the Week on Jan. 13. 

Nowcasts offer an early glimpse under the hood of an economy, given the time lag before governments release traditional datasets. In this case, our nowcast was wrong-footed by the resilience of the US economy.

This nowcast – the first of several we published in 2023 – estimated US gross domestic product in real time. It used industrial production, business surveys, financial market data and more to feed Macrobond’s built-in principal component analysis and vector autoregression model.

We’ve overlaid actual GDP data (in blue) on top of the green nowcast line. As you can see from the January 2023 datapoint on our chart, the nowcast called for a sharp growth slowdown that stopped short of a contraction. Instead, GDP growth accelerated.

Some 11 months later, our nowcasting model is again predicting deceleration to start the year. Will it be more accurate this time, given the Federal Reserve has finally “pivoted” and {{nofollow}}indicated it’s worried about overtightening?‍‍‍‍‍‍‍‍‍

Feb. 24: Geopolitical risk perceptions: Ukraine and Gaza from Germany to the US

First featured in Charts of the Week on February 24. 

In February 2023, almost a year after Russia invaded Ukraine, we thought it apt to compare this event to previous geopolitical shocks. We used a measure of perceived risk generated by Economic Policy Uncertainty, an academic group that tracks newspaper headlines.

Our “bubbles on a string” attempt to visualise the level of concern about various events in different countries. In the US, for instance, nothing compares to 9/11 as a moment of perceived maximum risk. For Germans, whose economy was so linked to Russian natural gas, the invasion of Ukraine caused much more worry.

Since we first published this visualisation, a smaller “pulse” has appeared from October – when Hamas attacked Israel and Israel invaded Gaza in response. But the size of the pulse hasn’t been uniform among nations.

Apr. 21: US small business was – and is – worried about credit conditions

First featured in Charts of the Week on April 21. 

The National Federation of Independent Business surveys smaller US enterprises about their expectations for access to credit in the near term. 

Our chart shows how the results of this sentiment survey – pushed one year ahead – can be a leading indicator for US bankruptcy filings. Bankruptcies slid to a multi-decade low during the pandemic due to {{nofollow}}state support programs, but have been creeping higher.

We first published this chart in April, when worries about a credit crunch were exacerbated by the failure of Silicon Valley Bank and other small lenders.

The second pane more directly expresses the “net balance” of the NFIB survey on a six-month time horizon. As the Fed moves to “pivot” to looser policy, survey respondents are slightly less pessimistic than they were eight months ago. 

‍‍May 5: The great global growth surprise of (early) 2023

First featured in Charts of the Week on May 5. 

This visualisation tracks the purchasing managers index (PMI) for manufacturing in economies around the world. PMI is an important indicator; it surveys executives about prevailing trends in their industry, and whether they expect contraction (red) or expansion (green).

Resilient global growth after a record-breaking tightening cycle was the surprising story of early 2023. The wave of green at that time is clearly visible – and the return of more red squares in late 2023 shows how that optimism has dissipated for developed markets since we first published this heatmap. 

The pessimistic turn in Germany and France is notable. Emerging markets have seen less change in the second half. 

Jul. 7: The OECD labour dashboard

First featured in Charts of the Week on July 7. 

This birds’ eye view of unemployment trends in 35 OECD member states showed how tight labour markets were – and how much progress southern and eastern Europe had made in lowering joblessness from past norms.

This analysis was motivated by the comments of European Central Bank President Christine Lagarde, who remarked that service-sector companies scarred by the pandemic may have been engaging in “labour hoarding,” fearful that it would be tougher to recruit should growth strengthen.

Five months later, the story remains broadly the same. Notably, Greece and Spain have lowered unemployment even further. Finland, Sweden, and Luxembourg all stand out as nations whose labour markets have deteriorated this year.

Aug. 11: “Early hiker” central banks have changed course‍

First featured in Charts of the Week on Aug. 11. 

Emerging-market central bankers are generally more used to fighting elevated inflation than their developed-market peers – especially during the past two decades. In August, we decided to see how nine “early hikers” fared in the inflationary cycle. Did inflation hawks send their countries into recession prematurely or unnecessarily? 

We considered four “recession criteria”: GDP, unemployment, manufacturing PMI and industrial production. By our metrics, only Hungary faced recession at the time of publication in August; indeed, the country was in technical recession for the first three quarters of 2023.

Fast-forward to today: global monetary policy dynamics have changed, with many of these nations – Brazil, Chile, Peru, Poland, and Hungary in particular – among the avant-garde in cutting rates. Against this new backdrop, our dashboard is flashing a lot more red and amber. Colombia and Czechia are quite likely in recession; Peru, Chile, and Poland face a close call. Hungary, meanwhile, has returned to a rosier outlook.

Aug. 18: Americans’ pandemic-era savings dwindle (but get revised upward!)

First featured in Charts of the Week on Aug. 18. 

The US consumer’s resilience in the face of inflation and higher borrowing costs was often linked to the stock of excess savings that built up during the pandemic. We examined this phenomenon several times over the course of 2023. 

Our chart tracks how this cushion is gradually deflating, leading observers to ponder when, and whether, Americans will finally tighten their belts. It also shows the role of fiscal support in building that cushion in 2020-21. 

This chart is also notable, however, because it has substantially changed since we first published it. The Bureau of Economic Analysis revised the underlying data points to reflect Americans’ surprisingly deep pockets. 

Aggregate excess savings for the second quarter of 2023 are now estimated at about USD 1.25 trillion – indicating that in August, we were working off an undercount of roughly USD 400 billion.

Sep. 22: The Fed’s hiking cycle and timing of recessions

First featured in Charts of the Week on Sept. 22. 

This chart headlined the 100^th anniversary of Charts of the Week in September. It was published against a backdrop of intense speculation about the end of the Fed’s hiking cycle and whether a recession would soon follow. 

Our chart examined recent US history to calculate the time between the end of previous hiking cycles and the onset of a recession. (Recessions are shaded in gray; the line tracks the Fed’s key interest rate; and dots reflect the months before a recession kicked in.)

Recessions followed quickly in the 1970s and 1980s. But for the last 30+ years, more than a year often passed between the end of a rate cycle and a recession.

No recession has kicked in yet, so our chart hasn’t changed. With the Fed strongly indicating this month that its next move is a rate cut, it’s probably time to retroactively start the stopwatch from July’s hike.

Oct. 13: Gaza, geopolitical events and the effect on oil prices

First featured in Charts of the Week on Oct. 13. 

Like the risk-perception chart, this visualisation examined the impact of individual geopolitical events – this time, on the energy market. Amid concern that the Israel-Hamas war might spread and entangle oil-producing nations, we charted the repercussions that 9/11, the Arab Spring and other events had on crude.

Saddam Hussein’s invasion of Kuwait stands out. Oil prices almost doubled soon afterwards. By contrast, 9/11 resulted in a price drop amid concern that the terror attack would result in recession.

More than two months have passed since we first published the chart in the wake of Hamas’ attack. An initial increase in the price of Brent crude did not last; concern about oversupply and slowing economies has driven prices down. 

That could change should {{nofollow}}attacks on Red Sea shipping by the Iran-linked Houthi forces in Yemen continue.

Oct 13: Green and red lights across the global economy

First featured in Charts of the Week on Oct. 13. 

This chart used the OECD’s Economic Composite Leading Indicator – based on particularly future-sensitive economic data – to contrast 17 countries. 

Comparing the most recent readings to the past five years, we assigned each country a red, yellow or green “traffic light” depending on the percentile range. We added an extra bubble to show the six-month direction of travel.

At the time of publication, the UK and China stood out, despite the post-Brexit travails and disappointing post-Covid reopening respectively: the OECD indicator was predicting a strong pick-up in prospects for both nations versus six months prior.

Our chart looks similar two months later, but China bulls can rejoice: with a record reading, its bubble is now literally off the chart. The outlook appears to be brightening for the US and Mexico, too. Italy is notable for reversing its optimistic trend since October; our traffic light is flashing red.

The winning asset classes of 2023: Bitcoin and oil trade places

Midway through December, it’s time to revisit our asset-class “quilt” from last year. What were the winning and losing investments in 2023, and how do they compare to recent vintages?

Bitcoin was by far the best performer among the nine categories we selected, boosted by optimism that ETFs will soon allow more investors to trade cryptocurrency. It’s continuing its streak as the most “binary” asset since 2016 – either performing the best or worst in each calendar year; it trailed the pack in 2022.

Meanwhile, oil went from the best performer in 2022 (on the back of the Russia-Ukraine war) to the weakest performer in 2023 amid concerns about slowing economies and oversupply.

Equities had a strong year. Interestingly, there was little difference between “value” and “growth” stocks in the S&P 500; value held up much better than growth in last year’s bear market.‍‍‍‍‍‍‍‍

The Fed’s history of brisk rate-cutting

Jerome Powell stunned Federal Reserve watchers this week by discussing prospects for rate cuts. The Fed has begun its long-awaited “pivot,” {{nofollow}}according to the Wall Street Journal.

With central banks signaling that victory over inflation is near, our chart examines the lessons of history. Once the “pivot” begins, how many rate cuts follow – and how quickly?

The lines for 1995 and 2002 demonstrate the only “plateaus.” By contrast, the 1990, 2001 and 2007 pivots resulted in a series of rate cuts in rapid succession. 

Futures markets are pricing in six US rate cuts next year – up from four earlier in the week, according to Bloomberg.

Visualising the Magnificent Seven

Apple, Amazon, Alphabet, Nvidia, Meta, Microsoft and Tesla were dubbed the “Magnificent Seven” by Bank of America strategist Michael Hartnett this year. The moniker stuck as these seven high-tech mega-stocks were responsible for much of the S&P 500’s gains in the face of a tighter rate environment and economic uncertainty.

This chart uses Macrobond’s FactSet Connector to assess price-to-earnings ratios across the Magnificent Seven (as well as the S&P 500 as a whole) since April 2013. We generated a Z-score, on the right-hand axis, showing us how far the P/E ratios are from historic averages (a Z-score of zero). 

The purple dots represent the most recent reading; the “candlesticks” represent percentile ranges, with the 10-90 range the “wick.”

Apple and Microsoft are the most richly valued stocks in the group, with P/E multiples in the top 10 percent of the historic range. Meta, meanwhile, is at the bottom of its 25-75 range, even after it more than doubled this year – showing how much more “bubbly” the social-media giant’s stock has been in recent history.

Historically, rate cuts aren’t a short-term tonic for stocks

Back to the Fed pivot. US stocks rallied on Powell’s comments, but history shows that equity performance after the central bank’s first rate cut tends to be unimpressive – probably because looser policy usually comes in response to distress in the economy.

Since 1990, most cycles have seen the S&P 500 fall in the two months after the first cut. The notable exception: {{nofollow}}the gains of late 2007, when the global financial crisis and US mortgage meltdown was just beginning.

US-Japan interest rate differentials and the exchange rate

Monetary policies in the US and Japan are headed in starkly different directions in 2024. The Bank of Japan looks set to abandon the world’s last negative interest-rate policy (and its yield-curve-control interventions) as the Fed loosens. 

This has implications for currencies, which are often substantially driven by rate differentials. US 10-year yields have recently contracted to about 4 percent versus 5 percent just weeks ago; yields on equivalent Japanese debt have held in a range near 0.7 percent. Roughly, this puts the rate differential at 3.3 percent at the time of writing.

This chart tracks observations of the USDJPY currency pair against that rate differential over the past three years. Broadly speaking, dots above the green trend line indicate moments that suggest dollar overvaluation. We’re slightly overvalued at the moment – even though the dollar has weakened from its peak.

We generated that green trend line through a regression analysis. It suggests fair value at a 3.3 percent differential is about 140 yen per dollar.

The ECB might lead the pivot to rate cuts

Markets are convinced that central banks will pivot to interest-rate cuts next year. Who will lower rates first – the Bank of England, the Federal Reserve, or the European Central Bank? 

This visualisation tracks the evolution of futures markets to show when a quarter-point cut from the terminal rate has been priced in.  This month, the ECB has taken the lead in the pivot race: its first cut is expected in April, compared with May for the Fed and July for the BoE. (Our next chart discusses the ECB comments that might have prompted this, and explores the effect on German bond yields.)

The three lines have moved in unison since the summer – showing how the pivot is expected earlier in 2024 than previously assumed.‍‍‍‍‍‍‍‍‍

Germany’s yield curve is compressing

German bonds have rallied since ECB official {{nofollow}}Isabel Schnabel recently suggested there is a limited likelihood of further interest-rate hikes in the eurozone, citing a “remarkable” inflation slowdown.

This chart shows the effect on the German yield curve versus very recent history – the current quarter. From 1-year to 30-year securities, yields are at their quarterly lows.

The right side of the chart tracks the deviation from the quarterly and yearly average yields. 

In search of stock bargains, Latin America appeals

US equities have rallied on the strength of mega-cap tech companies, optimism about a soft landing and hopes for lower interest rates next year. But as a result, they are also richly valued, potentially limiting their upside potential. 

Investors looking for cheap alternatives might use our chart to consider emerging markets. Latin America is the most undervalued, based on relative price-to-earnings (P/E) valuations versus US stocks.

In November, the relative 12-month forward P/E of Latin American versus US equities was lower than its 10-year interquartile range. By contrast, emerging markets in Europe, the Middle East and Africa (EMEA) were relatively close to the 10-year median. 

Some of the political and economic headwinds in the region are easing. {{nofollow}}Brazil has started cutting interest rates; in Argentina, markets responded positively to the election of libertarian populist Javier Milei.

The OECD raises (and lowers) inflation forecasts again

The Organisation for Economic Cooperation and Development has released its latest economic outlook, which includes revised 2024 inflation targets for member nations and other countries around the world.

This chart visualises the changes, comparing the latest national or regional figure to the previous OECD estimate (in green). The bottom pane expresses this a different way, showing how much the inflation forecast has gone up or down.

Some nations are faring better than others. For the OECD as a whole, consumer prices are expected to rise more than 4 percent next year – but that's down notably from the previous 5 percent forecast.

Slovakia and Colombia stand out, with the OECD raising their inflation forecasts to about 5 percent next year. Consumers in Spain, Lithuania and Costa Rica are among those breathing a sigh of relief.

The lurking losses inside US banks

The historic increase in interest rates has had a similarly unprecedented effect on banks’ balance sheets – driving down the market value of the Treasuries and government-backed mortgage securities these institutions hold.

Unrealised losses on securities at FDIC-insured commercial banks jumped by USD 126 billion from the prior quarter. Total unrealized losses now stand at USD 684 billion.

Our chart expresses this sum as a percentage of banks’ equity capital: this ratio has crept up to 30.5 percent, near the level seen when Silicon Valley Bank and other institutions failed in mid-2022.

Typically, these losses aren’t realised because banks can hold these assets to maturity. However, in times of panic, these assets are sold at market value – the primary driver of SVB’s collapse. 

Our chart breaks down the FDIC’s differentiation between “available-for-sale” securities and their “held-to-maturity” counterparts, which must stay on a financial institution’s books. Unrealised HTM losses are not reflected in financial statements. 

Ireland’s surging tax receipts, thanks to US multinationals

November is the key month for corporate tax receipts in Ireland – and the nation’s treasury is raking it in.

Our chart tracks November corporation tax receipts over recent decades. Last month, the government received EUR 6.3 billion, a 27 percent increase from a month earlier.

Ireland’s economic strategy has long been to {{nofollow}}attract tax-sensitive foreign investment with one of the world’s lowest corporate-tax rates. Reportedly, {{nofollow}}only three companies accounted for a third of all such taxes collected between 2017 and 2021. Most famously, {{nofollow}}Apple has said it’s Ireland’s largest taxpayer; the tech giant’s Cork-based entity is the “umbrella firm” for most non-US operations.

The surge in the early 2000s is notable. {{nofollow}}Ireland phased in this tax policy between 1996 and 2003.

How funds have moved between stocks and money markets

This is a visualisation of how money sloshes around between equities and “safe” cash investments over time. 

The blue line charts the ratio between the total assets of US money market funds and stock-market capitalisation; we’ve added a median line for that ratio. We then compare that to US interest rates (in green, pushed forward 18 months) and overlay periods of recession, in gray. Currently, assets in money-market funds stand at about 16 percent of the value of the stock market.

The experience of the 2000s stands out: rates rose, then the global financial crisis tanked the economy and stocks; investors fled to money markets for a safe return, and the ratio we are tracking soared. During the period of ultra-low rates that followed, money markets lost their appeal and equities recovered. A less pronounced version of this correlation occurred in the pre- and post-pandemic cycle.

History might not repeat itself. Currently, the US economy is facing a unique situation: short-end rates are at their highest levels in decades – increasing {{nofollow}}the appeal of money markets– but the economy might still be on track for a soft landing, which would be less damaging for stocks than the GFC or 2019-20 cycles. 

Visualising an analyst-driven investment strategy using FactSet

Wall Street analysts are {{nofollow}}sometimes derided for being behind the curve, but we’ve constructed a chart showing that it can pay to listen to them.

This chart taps the FactSet Connector for historic analyst ratings on Ford Motor Co. The bottom panel assigns weightings to “underweight,” “sell,” etc. to generate a month-by-month average rating from 1997. 

The top panel compares buying and holding Ford stock with a dynamic strategy: whenever the average analyst view descended to the midpoint of the “hold” range, our theoretical (and perhaps jaded) investor decided analysts were actually saying it was time to sell. Once the average crept above that level, the strategy would buy Ford again.

Ford avoided the bankruptcy that hit Detroit rival General Motors after the GFC, but on a 25-year basis, the stock was still dead money. A dynamic strategy based on analyst ratings, meanwhile, would have made five times your initial investment – and sometimes more.