What a Difference a Year Makes – Or Not

By: Steve Sosnick, Chief Strategist at Interactive Brokers

Faithful readers of this column know that I am a big fan of charts. While I readily acknowledge that technical analysis can both inform and mislead, they are incomparable way of succinctly conveying complex information. Or, a picture tells a thousand words.^[I] Regardless, during my normal morning perusal of charts, the following graph struck me:

One Year Chart, Dow Jones Industrials Average (INDU, red/green); S&P 500 Index (SPX, purple); NASDAQ 100 Index (NDX, blue)

Source: Interactive Brokers

In short, major US indices have treaded water for the past year. We tend to think in terms of calendar years, which is a valuable if arbitrary rubric, but our lives proceed on a day-to-day basis. Most of us have been busily tending to our investments for the past year, yet some of the most popular benchmarks have made little progress when viewed on a different arbitrary timeframe. 

The graph above does a good job of displaying the data on a common scale, but we will switch to using a type of graph that more explicitly normalizes the data:

One Year Normalized Chart, (INDU, white/blue); SPX, (yellow); NDX, (red)

(Click on image to enlarge)

Source: Bloomberg

We see in the graph’s legend box that over the past year INDU is up about 1%, NDX is up just under 2%, and SPX is the best performer at over 6.5%. There is an interesting consideration here.We have quite similar results for both NDX and INDU over that time span, but INDU was far less volatile. Throughout most of 2021, it was clear that NDX was the better performer. Now that we change the time horizon, I would argue that INDU (an average I’m not normally fond of utilizing) proved to be a better investment over that span. What may be even more surprising, if we look to the start of 2021, INDU was the far better performer than NDX, though SPX offers higher absolute returns:

Normalized Chart from Start of 2021, (INDU, white/blue); SPX, (yellow); NDX, (red)

(Click on image to enlarge)

Source: Bloomberg

Indeed, INDU offered a 5% higher absolute return AND less volatility than NDX since the start of 2021. Betcha’ weren’t expecting that.

If you’ve been in US stocks, even with the recent roller coaster, you have outperformed the usual safe haven of Treasury notes, as evidenced by the graph below:

One Year Normalized Chart, 2 Year Note Futures (TU1, green); 10 Year Note Futures (TY1, white/blue)

(Click on image to enlarge)

Source: Bloomberg

We have all heard about the dramatic rises in Treasury yields, but they appear much less detrimental when we utilize prices rather than yields, especially for the 2-Year. Even so, 3% and 5% losses in supposedly safe investments are nothing to sneeze at. These investments did little throughout most of last year, then sank sharply this calendar year along with stocks. A hedge that mirrors the move of the items that you are trying to hedge is not much of a hedge after all.

Guess what has proven to be a very useful hedge. Yes, the stodgiest of old-school hedges, gold:

One Year Normalized Chart, 2 Year Note Futures (TU1, green); 10 Year Note Futures (TY1, white/blue); Gold (XAU, red)

(Click on image to enlarge)

Source: Bloomberg

Indeed, over the past year, gold has outperformed Treasuries and major US indices. Most of that outperformance has occurred over the past two months when geopolitical worries came to the fore, but that is exactly what gold investors would expect. The flight to safety trade was lacking in fixed income, yet evident in gold. 

As for “digital gold” over the same time frame? The less said, the better:

One Year Normalized Chart, 2 Year Note Futures (TU1, green); 10 Year Note Futures (TY1, white/blue); Gold (XAU, red); Bitcoin (XBTUSD, purple)

(Click on image to enlarge)

Source: Bloomberg

We have been rather US-centric thus far in this piece. Let’s take a look at key European indices – the Euro Stoxx 50, UK’s FTSE 100, and German DAX alongside the MSCI Emerging Markets Index:

One Year Normalized Chart, Stoxx 50 Index (SX5E, white/blue); FTSE 100 (UKX, yellow); DAX (red); MSCI Emerging Markets Index (MXEF, purple)

(Click on image to enlarge)

Source: Bloomberg

As with the US indices, the continental indices gave back last year’s gains and then some, though they have bounced off recent lows. The FTSE is proving to be a real winner over the past year, up nearly 7% and never giving back its gains over the period. Emerging markets have suffered, though. Higher interest rates, higher commodity prices, and a stronger dollar offer a triple whammy to most emerging markets. Until recently, the index also contained Russian stocks, which didn’t help returns, and it still contains Chinese stocks. Those are currently not helping, as we see in our graph of Asian markets below:

One Year Normalized Chart, Nikkei 225 (NKY, white/blue); CSI 300 Index, (SHSZ300, yellow); Hang Seng, (HSI, magenta)

(Click on image to enlarge)

Source: Bloomberg

We have been discussing the woes of Chinese-linked shares for some time, most recently on Friday, and we saw further weakness today. Japanese shares have not dominated the headlines in the same way, but as a commodity importer, it is not surprising to see that market underperform as commodities rise. Compare the Nikkei’s performance to two commodity-exporting countries that also border the Pacific, Australia, and Canada:

One Year Normalized Chart, Nikkei 225 (NKY, white/blue); S&P/ASX 200 Index, (AS51, red); S&P/TSX 60 Index, (SPTSX60, purple)

(Click on image to enlarge)

Source: Bloomberg

Indeed, both Australia and Canada have been significant beneficiaries of the commodities cycle. Canada, which has more oil and less reliance upon China, has been the true winner. It is up year-to-date (though slightly), which is unique among developed markets, and is off its recent highs by less than 1%. 

One year is an artificial time frame, but what a difference it makes, whether we are discussing individual market moves or comparing global benchmarks.

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[i] Even though I use about 1,000 words to discuss these graphs, imagine how many more I would use if we didn’t display them.