In this edition of ChartCritic we look at a chart that was directed to our attention by Jim Rickards on Twitter. The chart shows the remarkable (out)performance of commodities, and specifically gold vs the S&P500 (and yes the S&P500 Index is a total return series – I tried replicating the chart and only the total return index vs price only index lined up with it).
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So there's a couple of things to talk about and I've got 2 response charts down below which highlight a couple of important lessons in market analysis, or time series analysis in particular (and much of markets is time series analysis).
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The first issue is the importance of starting point in cumulative return analysis. Different starting points can result in vastly different conclusions, as the below shows. This is particularly relevant in this case as the S&P500 was trading on its highest ever valuations around the start of that chart, which placed the odds against it. One alternative is to look at rolling returns, and in fairness you actually end up with a similar conclusion, but at least you can see the evolution of returns across time. So be careful what, where, and when you look at when it comes to markets and time series analysis!
When comparing cumulative returns, the starting point has a massive impact, see the experience from 1990 - it has the S&P 500 coming in way on top vs the from 2000 chart. One important detail was that the S&P500 was trading at record high valuations at that time so the odds were against it.
Another view shows the monthly rolling 10-year CAGR or Compound Annual Growth Rate for gold and the S&P500 (price only) index. You can see that through much of the period gold under-performed, with two major notable exceptions.
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Article by Callum Thomas, Top Down Charts