They say a picture is worth 1,000 words and a good chart fulfills a similar function.
A well-chosen chart can provide a useful shorthand guide to an important investment theme or to the market’s view on major economic issues. A chart is, necessarily, an oversimplification of a complicated subject. But it can serve as an early warning indicator of a change in trend, or equally, as confirmation that a theme is yet to run its course.
I’ve picked out five that I think investors should be paying particular attention to right now.
Battered Britain
At the end of September, non-financial journalists got a crash course in gilts after then-chancellor Kwasi Kwarteng’s exuberant mini-Budget was thwarted by an unexpected leverage crisis in the defined-benefit pension sector. This resulted in a sharp selloff in the UK government debt market, which drove Britain’s cost of borrowing (not to mention mortgage rates) sharply higher.
Almost immediately, the Bank of England stepped in with the promise of an open chequebook, the Conservative party had a huge clearout, and the story got boring as a semblance of stability returned. I suspect it’s going to stay boring for a while now, but this next chart is a good way of monitoring that.
The chart shows the yield on 10-year bonds for the US (Treasuries — in purple), the UK (gilts — in white), and Germany (bunds — in blue). In absolute terms, yields generally have been going up across the globe this year as inflation picks up and central banks try to tackle it.
But as you can see from the way the white line surges above the purple one in late September, the UK was singled out by markets — gilt yields spiked relative to those on US Treasuries or German bunds, which was bad news. It’s now back to its more “normal” position, hovering between the US and Germany. If current Chancellor Jeremy Hunt somehow panics investors again, or it turns out that there is more hidden leverage in the pensions system, this is where we’d see it revealed.
Lost ARKK
We’ve just experienced what I like to call the “long-duration” bubble, or to put it in plain English, the “jam tomorrow” bubble. The Ark Innovation exchange-traded fund (ARKK to its friends) is the flagship investment vehicle of fund manager Cathie Wood who, arguably more than anyone else, has been the face of this bubble.
Duration is a term typically applied to bonds. It’s a measure of how sensitive the price of a bond is to changes in interest rates. It’s derived from the length of time it takes for the bondholder to get cashflows from the bond. The longer the duration, the further into the future the cashflows lie, and the more sensitive the bond price is to changes in interest rates.
But you can apply it to other assets too. It’s basically all about the value of money over time. When interest rates are low, money today is not worth much more than money in the future. So if a stock doesn’t throw off much cash today, but is building a “network” that promises to generate a huge pot of money in the future, that’s much more appealing in a low-rate world than a stock that generates cash at a steady pace but isn’t showing much signs of growth. That’s why tech stocks have done so well over the last decade while “boring” stocks have lagged.
However, once interest rates start rising, cash today becomes more valuable than cash tomorrow. And so “jam tomorrow” is a less appealing business model. The further away the pay date, the lower the present value.
ARKK is filled with stocks like that. For example, the top holdings include Elon Musk’s Tesla Inc., everyone’s favourite Covid-era tool, Zoom Video Communications Inc., and streaming device maker Roku Inc. The ETF hit its peak in February 2021, which is when markets started to realize that central banks were serious about tackling inflation. It’s barely paused for breath on the way down.
Since then, ARKK has lost about 75% of its value. The bottom came on Nov. 9, when it fell below $33. Since then, signs of slowing inflation in the US, and the resulting hopes that the Federal Reserve will call a halt to interest rate rises, have created a rally for ARKK. If it can hold above that November bottom, it’s a good sign for the rest of the market.
Hampered Housebuilders
UK house prices are falling and the only debate now is how far they’ll drop over the next year. But housebuilders were signaling this crash way before the rest of the industry turned gloomy. Just take a look at the chart of the FTSE 350 Household Goods and Home Construction Index, which is made up of nine key UK housebuilding stocks.
If you take the chart back further, the housebuilders actually peaked in February 2020, right before the pandemic kicked in, and they’ve never quite regained that peak since.
The stocks have rebounded after hitting bottom on Oct. 12. That’s happening despite generally gloomy updates from the housebuilding sector, not to mention the return of Michael Gove as a rather more effective housing minister than some would like. Might the housing bust be less severe than some fear? This chart is probably a more useful leading indicator than any house-price survey.
New Commodities Boom
There’s been a lot of talk of a new commodities “supercycle,” rooted in years of underinvestment on the supply side, and a need for massive infrastructure investment to drive the green energy transition on the demand side.
Glencore Plc is arguably the most powerful commodity trader in the world. So if there’s something to this new commodity supercycle, the company will likely make money, whether it’s in coal, lithium, copper or anything else.
What might not be entirely obvious from the chart below is that Glencore has an excellent history of mapping the fortunes of the commodity sector generally. It went public right at the top of the last commodities bull market, in May 2011 — surely one of the best contrarian indicators ever seen. It then had the closest thing to a near-death experience at the bottom of the bear market, towards the end of 2015.
Now it’s back at its IPO price, having traded below it for the vast majority of its listed life. If the supercycle is for real and has legs, one good indicator would be Glencore heading decisively higher from here.
Big Daddy
Finally, the most important price in the world. That is, the US dollar (or at least, the Bloomberg dollar index — the value of the US dollar as measured against a basket of 10 other major currencies).
Why does the US dollar matter so much? Put simply, the greenback is the global reserve currency. Everyone needs it, even if it’s not your local currency. So when the US dollar gets more expensive, global monetary conditions tighten and a “risk-off” mood grips markets. When the US dollar gets cheaper, monetary conditions loosen, and “risk-on” gets going.
In the past year or so, the US dollar has been on a tear because the Federal Reserve is the most aggressive central bank and the US is the most healthy global economy. But that run stalled in late September, and with recent US inflation data coming in a little less hot than feared, investors are starting to hope that the Fed will relent before the surging US currency breaks something important.
If so, that could be very bullish for the run-up to Christmas (the traditional “Santa rally” period). If not, look out below.
Bloomberg News provided this article. For more articles like this please visit
bloomberg.com.
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