We hope that you enjoy the latest Chart Attack report, highlighting some of our key economic charts to keep an eye on. We have outlined below our thoughts on a few charts that stood out to us.
Equities and Bonds Performance
Based on the YTD and 1-year equities and bonds total return index, we can see that 2022 has been a tough year for financial assets. On the left-hand side, we see the year-to-date (YTD) performance of global bonds and equities, ranging from (5%) to (38%), except for Brazil and Argentina. To highlight some of the most drastic drawdowns on a YTD basis, we have seen UK 10-year bonds decline (~38%), the UK stock market decline just over (20%), the US markets also around (20%), Canadian 10-year bonds and stock market move (~17%) lower, and the US 10-year bonds (15%) lower. Rising interest rates and bond yields have forced bond prices and equity prices much lower. It is fascinating to see the impact on such a global scale, as most countries are raising rates to curb inflation. This image will certainly be one for the books, as one of the sharpest global drawdowns in history for both bonds and equities.
Twelve-Month Forward P/E Ratios
The equity markets facing such a severe drawdown this year has caused equity valuations to compress. The Canadian markets P/E level is at 11.1X, well-below its long-term average of 14.3X. The US P/E is 15.9X, close to its long-term average of ~16.0X. This valuation comparison across geographies and markets highlights the range-bound nature of P/E multiples over the past couple of decades. P/E multiples have been steadily expanding over the past several decades, but with interest rates now close to where they were in the early 2000s, P/E multiples are also at 2000 levels. Logically, this reversion to the mean makes sense, but the question is at what point do we see a rebound in valuations, and where is the floor?
The US Dollar
Just about the only thing working this year has been the US dollar, which has risen substantially against its peer group of currencies. One notable advancement has been against the Canadian dollar. The US dollar has increased from parity in 2008-2010 to $1.36 today. The rapid increase in the US dollar relative to other currencies has created headwinds for corporations that generate revenue in the US dollar and are required to convert it back to their local currency. A strong US dollar is also impacting global trade, foreign bonds, and international stock markets, as the global economy is thrown into a rapid adjustment to a stronger dollar. How far the dollar rises is mostly up to how far the Federal Reserve hikes interest rates, but it seems to us that the bulk of interest rate hikes has occurred, and what is left may have a diminishing impact on the US dollar.
Canadian Housing Market
The Canadian housing market is a significant contributor to the country’s GDP, and with borrowing costs exploding higher this year, housing prices has begun to crater. We can see in the chart that on a year-over-year basis, housing prices have begun their descent, and in prior instances the market tended to bottom close to a 0% or (3%) YoY decline. With sustained higher borrowing costs and mortgage rates, it is likely that we will see housing prices continue to decline year-over-year, and we believe that any alleviation in mortgage rates (which are led by bond yields) can lead to supporting higher housing prices.