How wonderful are watches? Time personified in a little machine on your wrist.
From Jewelry to Timekeeping
Wristwatches are a relatively new phenomenon. Prior to World War I wristwatches were primarily worn by women, and they were called ‘’wristlets’’. They weren’t particularly good at accurate timekeeping, but they were fashionable, and many jewelry houses made them. Men primarily carried pocket watches, which were larger but more accurate and stored away. The small pocket inside the larger front pocket on men’s jeans, also known as the “coin pocket,” has roots in older garment designs meant for storing pocket watches.
During World War I it became apparent that carrying a pocket watch on a battlefield didn’t make much sense. The US & British militaries contracted the various pocket watch manufacturers to design a wristwatch for their soldiers. These were standardised, had luminous hands and big numbers making them easy to read. They also had a hacking function, meaning that if the crown was pulled out, the seconds hand stopped ticking. This allowed for synchronization of watches to the second. Helpful for coordinating tactics. Upon the completion of the Great War, soldiers returned to civilian life, and continued with the trend away from pocket watches towards wristwatches.
Since then, wristwatches were primarily worn for their timekeeping function, rather than for their use as jewelry. Of course, amongst the elite there were still watches that were worn as status symbols, but this was not in the main.
Timekeeping experienced a leap forward when Seiko started mass producing quartz-crystal based (battery operated) watches. Now anyone could buy a cheap watch that kept time better than any mechanical Rolex at a 100th of the price! Today, we all check our phones if we want the most accurate time of day.
From Timekeeping to Jewelry
Fast forward to 2022, and wristwatches experienced another role reversal. Once again, their prime function went from timekeeping to jewelry.
Below are two charts. The first is a chart of an index comprising 60 watches from the top 10 luxury watch brands by transaction value. It shows their average market price in USD over the prior 5 years.
The index peaked in April 2022, when watches such as the Patek Phillipe Nautilus 5711 /1A sold at prices up to $198 000 which is 5.7x its recommended retail price of $34 890. What happened in April 2022 for luxury watch prices to decline so sharply?
One potential driving force is that the cost of debt went up rapidly. It is easy to speculate and trade when interest rates are near 0% implying no cost of debt. It’s a different matter when interest rates go from 0.25% to 5.75% (Federal Funds Rate) in a matter of months.
Interest rates were exceedingly low up to March 2022 when the US Federal Reserve started to raise them aggressively. They were forced to do so in order to curtail inflation, which was at multi-decade highs in the US. Inflation is simply a general and sustained rise in the prices of goods and services eroding the value of the currency used to denominate them.
Higher interest rates meant people were less willing to borrow, implying less money to buy things with, which in turn drove down prices of services and goods, such as luxury watches, and thereby curtailing inflation.
Chart: WatchCharts Overall Market Index. Source: Watchcharts.com
Chart: US Federal Funds Rate
Bubbles
Whilst the wristwatch market tends to be a microcosm of a bubble in the greater scheme of things, similar bubbles tend to form all the time. Some smaller and some much larger. Below is a graph displaying some of the most popular search terms over the prior few years. Their individual popularity are all indicative of the rise and fall of the prices of the things related to them at one point or another.
Source: Morningstar
Bursting Bubbles
There will always be times when bubbles form, and when it becomes tempting to join, particularly during their latter stages. However, bubbles tend to pop, and speculators tend to run out of luck. As investors it makes more sense to wonder at bubbles from afar and to rather spend time understanding markets and what drives them.
Fintax is an authorized FSP642
29 August 2023