Trying to understand the markets? We asked analysts for the best indicators for right now

Oil tanker traffic through the Strait of Hormuz used to be a niche data point. The launch of the U.S.-Israeli attack on Iran in February changed that, transforming it from an obscure focus of commodities trading desks to a rapidly rising Google search term.

To understand how analysts and investors are making sense of a changing world and market landscape, The Globe and Mail asked them for their favourite indicators. Here are some of their responses, edited for length and clarity.

Crude prices: Higher for longer

Ethan Currie, strategist, National Bank

It’s one thing to monitor spot crude and gas prices, but we’re also looking at how the futures curve has developed. This will provide some indication of whether markets expect supply disruptions or geopolitical premiums to linger in the months and quarters ahead.

The message is clear if you use these curves as a guiding input: Markets don’t expect crude to return to prewar levels anytime soon. That’s an important consideration when thinking about inflation dynamics.

Concentrating on concentration

Marc Sheard, equities portfolio manager, Vancity Investment Management

We don’t rely heavily on specific market indicators, as many are too short-term in nature and can be difficult to translate into durable investment ideas. Our emphasis is on maintaining a longer-term perspective and avoiding the biases that can come from reacting too closely to near-term market signals.

One area we have been watching is market breadth, particularly given how concentrated equity markets have become in recent years.

Over each of the past three years, only about 30 per cent of S&P 500 companies outperformed the index. This year, that share has risen to more than 50 per cent on a year-to-date basis, which may indicate broader participation across the market and less dependence on a single theme or narrow group of stocks.

Watching the curve

Sandy McPherson, chief investment officer, City of Edmonton

The indicator we are keeping a close eye on is inflation rates, and by extension interest-rate decisions, especially at the long end of the yield curve, and what it’s telling us about where inflation expectations and term premiums are settling out.

For the City of Edmonton managed funds, this is shaping how we expect to execute our upcoming rebalancing out of equities and into fixed income to return to policy asset mix targets. Elevated long rates mean we’re able to lock in materially better yields than we could two or three years ago.

We’re watching the curve shape closely. If the long end keeps drifting higher on persistent inflation and term premium repricing rather than growth, we’re more inclined to stagger purchases rather than extending duration all at once.

Running hot

Kim Shannon, founder and co-chief investment officer at Sionna Investment Managers

My favourite indicator is watching inflation when it is above 2.5 per cent and above 4 per cent.

The value investment approach outperforms the growth approach by 11 per cent annualized when inflation is above 2.5 per cent. Since rates and inflation bottomed in the summer of 2020, the iShares Canadian Value Index ETF has outperformed the growth index by 13.8 per cent.

National Bank showed that in the five prior periods when inflation was north of 4 per cent, Canada on average outperformed the U.S. by over 8 per cent, and commodities did well. Subsequently in 2022 when inflation was strong, Canada outperformed the U.S. by just over 8 per cent.

Inflation favours the value investment style, favours commodity pricing and favours investing in Canada.

Return of the ‘hard metrics’

Ken Chen, portfolio manager, index strategies at Global X

Some of the new indicators I’ve been viewing are what I would call hard metrics like steel production and power generation. I think in a world of peace we’ve been so used to thinking about things in monetary terms. When things get tense those actually mean less.

A lot of these classic industrial production indicators used to be pretty important. But since the Cold War we’ve been abandoning a lot of them in favour of more monetary terms and financial indicators. Those production indicators are the kinds of things I’m reverting back to, and they tell pretty interesting stories. They paint a slightly different picture from GDP per capita and CPI, for example.

More people are paying attention to power generation because of AI. It’s the first buildout in quite a while that actually involves lots of capex. It’s not your traditional infrastructure, but it’s bringing back copper production, lithium production – a lot of these hard production numbers.

Who’s buying?

Tiago Figueiredo, macro strategist at Desjardins

I’ve become increasingly interested in measures of investor demand. We spend a lot of time debating growth, inflation and central bank policy, but markets are ultimately set at the margin by buyers and sellers. Whether it is foreign participation in government bond markets, shifts between active and passive investing, or changes in equity market concentration, understanding who is providing the capital has become increasingly important when assessing the potential cost of moving from a world built on efficiency to one built on resilience.

On fixed income, I’m paying closer attention to who is actually buying government bonds. That means looking at foreign participation, the balance between official and private investors, investment fund holdings and demand at government debt auctions. These indicators help us assess whether the investor base is becoming more price-sensitive as governments issue more debt to strengthen supply chains, expand defence capacity and invest in energy security.

The emerging message is that resilience will likely require more borrowing, while investors may demand greater compensation to finance it. That is one reason term premiums are rising, making longer-dated yields less responsive to the economic cycle and changes in policy rates.

Taking the long view

Greg Moore, partner and portfolio manager at Richter LLP

You watch a lot of different things. There used to be all sorts of sort of very nebulous or untracked indexes that people were looking at as the canary in the coal mine. There’s nothing that really sticks out to me right now.

We’re not a very tactical shop in the way we advise our clients. We’re not going to be making any bold calls to say, “oh, you know what, we need to be significantly lowering our equity exposure here because this particular metric is getting into overbought territory.” We’re very much long-term investors and we maintain a sense of discipline for our clients.