At the start of the year I posted an article on The Charts to Watch in 2018. It covered some of the key charts and indicators from my 2017 End of Year Special Edition and at the time attracted a lot of interest. So I thought it would be a good idea to do an almost halfway point update as an eventful 2018 has so far seemingly rushed by.
The format of this article is the same as the original, but I will leave in the exact comments on the charts (in italics and quote marks) for the sake of transparency. Aside from updating the charts, I have added my updated views and what has changed or become more apparent since then.
But before we get into the charts, here's a quote from the introduction of original post:
"I've said it before and I'll say it again: 2018 is going to be harder and more complex for investors than 2017. The cross currents of rising valuations across asset classes, maturing of the business cycle at a global level, and the turning of the tides in monetary policy could make 2018 a watershed year."
Yep. Sure looks that way!
1. "No more spare capacity in DM. (Next step = Inflation)" Nothing to add to this. If anything investors should be paying even more attention to this chart.
2. "A secular bottom in 10-year bond yields looks to be on the cards."
It did then, and it certainly does now. The only question now is how far bond yields will go.
3. "The monetary tides are going out. (be careful!)"
Gold seems to be defying monetary gravity, I can create a narrative as to why gold isn't a lot weaker e.g. geopolitical risk hedging demand, greater equity market volatility, but my view remains that investors are underestimating the risks in this "hedge".
4. "Emerging Markets cross-asset risk pricing is complacent/confident, and for now is engaged in a virtuous cycle as improving economics reinforce the relaxed risk perceptions."
The complacency has been shaken a bit. This is something I am focusing a lot of my work on right now.
5. "Likewise, US HY credit spreads are anchored by solid macroeconomic cycle dynamics… in other words, 'expensive' can stay expensive for the time being."
US high yield credit spreads were remarkably well behaved during the global equity market correction - just goes to my original point that the cycle isn't over yet.
6. "US cyclical stocks are closely keeping pace with the very strong ISM manufacturing PMI but the relative performance ratio looks very stretched, likewise absolute and relative valuations. This is a key area to keep on top of as the new bull market in America (and globally) has been driven by solid outperformance by the cyclical stock sectors."
Interestingly cyclicals vs defensives were also relatively unshaken during the correction, but again this is something I am continuing to dedicate work to as it seems like an obvious market-risk fault-line.