Greedy investors, fiscal deficits and the Red Sea crisis for shipping

This edition of Charts of the Week begins with a 96-year breakdown of different stock regimes and then turns to crises in the news: attacks on shipping in the Red Sea have implications for inflation in China and elsewhere. We examine Boeing’s orders in the wake of the latest 737 Max incident, stagnation in Peru, US budget deficits, Japanese inflation and indicators suggesting investors remain greedy for risk assets despite it all.

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

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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

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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 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, 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. 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

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Spiking shipping rates are in focus amid 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 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 political turmoil and lingering aftershocks from the pandemic have hit the economy hard of late. Market expectations suggest the 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.