US election, Bitcoin and real estate bubbles

S&P 500: the January Effect 

Can the performance of the S&P 500 in January set the tone for the rest of the year? The first month of the year has often been viewed as a bellwether for the following 11 months in a phenomenon known as the “January Effect” or “January Barometer.” 

This chart reveals a trend going back to 1929, showing that a positive January often leads to a yearly gain of 13.2 per cent. Conversely, a negative January typically precedes an annual loss of 1.8 per cent. The rise of 1.6 per cent in January this year hints at a strong 2024, with a six per cent increase surpassing the average improvement when the S&P 500 is in positive territory.‍

S&P 500: the US Election

Investors are understandably eager to understand how the US election could impact equities, particularly the S&P 500. We have therefore analyzed the historical performance of that index at the year-end following past presidential elections, with a specific focus on periods when the incumbent party was Democratic. 

On average, a win by the Democratic party correlates with the S&P 500 achieving returns between 10.4 per cent and 13.4 per cent. 

In contrast, Republican victories see the index delivering slightly lower year-end returns in the range of nine per cent to 9.5 per cent. 

While Democratic wins are correlated with greater returns, the range of outcomes in that scenario are broader and so more unpredictable, suggesting that the S&P 500's performance in election years is not purely politically driven.

Adding Bitcoin to a 60/40 portfolio

A dash of Bitcoin can go a long way to juicing up investment returns, this chart suggests. 

Adding a mere one per cent allocation of the cryptocurrency to a classic 60/40 investment mix (60 per cent equities and 40 per cent 10-year bonds) can deliver a striking six per cent fillip to a portfolio.

This impact highlights not only Bitcoin's role as a powerful means of enhancing returns, but also underscores how digital currencies are reshaping the investment landscape, with minimal exposure potentially delivering disproportionate benefits.

Emerging markets with high bond yields and limited FX risk

The Federal Reserve’s interest rate hikes appear to have peaked, laying the foundation for a potential weakening of the strong US dollar. This would be a major development given the dollar's position as a global reserve currency that has outperformed many other currencies in recent years. 

Meanwhile, many emerging market central banks have lowered their interest rates, potentially making bonds and other investments denominated in their respective currencies more attractive. 

This chart highlights 10-year government bond yields against the backdrop of foreign exchange volatility — a primary concern for bond investors — with the aim of identifying opportunities where the potential for income (yield) and capital appreciation outweighs the risks associated with foreign exchange (FX) volatility. 

India, Indonesia and the Philippines emerge as standout countries from this analysis, with bonds offering both high yields and limited currency risk.

CAGR vs. volatility by asset class

This chart compares the volatility and the Compound Annual Growth Rate (CAGR) of various asset classes over the past 20 years, with CAGR measuring the mean annual growth rate over the period assuming that profits are reinvested at the end of each year.

US equities have been stable over the period, with only minor fluctuations in price while yielding the highest growth rates, suggesting a favorable risk-reward balance for investors.

Emerging market equities have also been volatile, but have delivered lower returns than their US counterparts, indicating a higher risk for the returns achieved. European equities, infrastructure and real estate investment trusts (REITs) have clustered in a band of lower volatility and moderate growth, suggesting they can be considered stable investment options with reasonable growth potential for investors with a lower risk appetite.

Real estate bubbles worldwide

This chart combines the UBS Global Real Estate Bubble Index with economic forecasts from Oxford Economics for major cities around the world. The Bubble Index categorizes markets as follows: below -1.5 indicates a depressed market; -1.5 to -0.5 an undervalued market; -0.5 to 0.5 fair value; 0.5 to 1.5 an overvalued market, and above 1.5 a bubble. Based on the latest data, only Zurich and Tokyo appear significantly overvalued, with their bubble status having increased over the past few years. Compared to two years ago, the number of cities classified as overvalued has dropped from nine to two, reflecting changes in the global real estate market.

Fed's rate peak and government bond yields

This chart examines 10-year government bond yield trends in major economies once the Federal Reserve reaches the highest point of increasing interest rates, known as the “Fed's rate peak,” using data from 1984 to the present. 

Specifically, it looks at the latest cycle, suggesting the Fed's rate peak was in July 2023, with the European Central Bank and the Bank of England potentially peaking shortly after. 

The 10-year US Treasury yield is above the typical range, suggesting higher interest rates. In contrast, the German 10-year bond, the Bund, shows a slight increase but remains within a normal range, while the UK's 10-year bond, the Gilt, is at or below its average rate. These trends may reflect the recent surge in US consumer prices, Germany's positive economic data and the UK's less favorable economic and inflation figures.

Australia employment indicators

This chart highlights the current state of the Australian job market via a range of indicators such as unemployment and underemployment rates, comparing them to data since 2000. The indicators suggest that the Australian labor market remains tight, although there has been a slight normalization. This ongoing tightness, especially if it continues to be slower to reach full employment, may contribute to ongoing inflationary pressures in the country.