Market index returns

Month to date since August 31, 2024 as of September 30, 2024

Index definitions: Global Real Estate = FTSE EPRA/NAREIT Developed Index; Global Infrastructure = Dow Jones Brookfield Global Infrastructure Index; Natural Resource Equities = S&P Global Natural Resources Index; Commodity Futures = Bloomberg Commodity Index; TIPS = Barclays US TIPS Index; Global Equities = MSCI World Index; Real Assets Index = 30% FTSE EPRA/NAREIT Developed Index, 30% Dow Jones Brookfield Global Infrastructure Index; 15% S&P Global Natural Resources Index; 15% Bloomberg Commodity Index, 10% Barclays TIPS Index. Source: Bloomberg, DWS. Past performance is not indicative of future results. It is not possible to invest directly in an index.

Global equities rose during our review period with the MSCI World Index reaching a new all-time high this week. Fresh stimulus from China, a U.S. Federal Reserve (Fed) bent on preserving economic growth, and possibly some window dressing ahead of what looks to be a positive quarter for stocks all helped send markets higher. Although inflation breakeven (both the 5- and 10-year) picked up a touch this week, they’ve been hanging around the Fed’s 2% target level since the start of August, giving policymakers additional confidence that high inflation is in the rearview mirror and bringing a new debate to life: will we see another 50 basis point (bps) cut in November? Some investors think so, with Fed Funds futures indicating a 50-50 chance of a 25 or 50 bps cut at the conclusion of the Fed meeting on November 7th. Meanwhile, the U.S. dollar (per the DXY Index), which has been in descent since June, held relatively steady this week, yet gold prices broke out to a new record high (which we discuss below) as economic uncertainty, geopolitical conflicts, and strong demand from central banks keep buying interest high for the shiny yellow metal.^[1]

Against this backdrop, Real Assets moved higher this week overall but fell short of the broader equity market’s return. Of the Real Assets classes, Commodities and Natural Resource equities saw the largest gains, largely driven by precious metals in the former and bulk metals & mining names in the latter; both Commodities and Natural Resource equities bested the broader markets. Returns were slighter, but positive, in Global Infrastructure securities and Global Real Estate Securities, while Treasury Inflation-Protected securities (TIPS) were essentially flat for the week.^[2]

Why it matters: Relative calm in markets is not a reason to become complacent as potential risks remain. Congress passed a continuing resolution (CR) and will avoid a government shutdown in October, except it only provides funding until December 20th. Being that this is just after the election, will lame duck members of Congress hold the next budget hostage? They will then need to address the debt ceiling swiftly before the next Congress is seated. Speaking of the U.S. election, we see no clear evidence of a frontrunner for president, yet this role will shape domestic and foreign policies for years to come and could even decide the fate of Ukraine. A strike by port workers, which looks increasingly likely next week, will gnarl global trade and cause supply disruptions that could cause inflation to reignite. With all this in mind, is your portfolio bulletproof?

Macro Dive: This week we look at the latest data on U.S. economic growth and inflation. We’ll also look at U.S. Purchasing Managers’ Index (PMI) data for September before giving an overview of the latest stimulative measures out of China.

• Inflation continues to chillax: August’s Personal Consumption Expenditure (PCE) data was released following our review period and continued to show progress in stunting price growth. Headline PCE of 0.1% month-on-month and 2.2% year-on-year were in line to better-than-expected, and both fell from July’s prints. The Fed’s preferred inflation gauge, core PCE (which excludes volatile food and energy), was 0.1% month-on-month, tied for the lowest read this year and better than estimates and July’s level, which were both 0.2%. Year-on-year core PCE for August was 2.7%, matching estimates and a hair higher than July’s 2.6%. On a three-month basis, annualized core PCE of 2.1% is essentially on top of the Fed’s 2.0% inflation target. Meanwhile, both personal income and personal spending slowed to 0.2% in August from July, both below estimates and the month prior, but one could expect this with cooling inflation and cooling economic growth. It’s too early for the Fed to declare “soft landing achieved,” but this week’s data certainly points in that direction. Next week’s non-farm payroll data and unemployment rate for September (current estimate is 4.2%) will give us new signs of the state of employment in the U.S.^[3]
• Mind the gap – services vs manufacturing: This week, S&P Global released its U.S. PMI data for September, in which the overall composite fell slightly to 54.4 from 54.6 in August but exceeded expectations of 54.3 (anything over 50 indicates expansion). However, it was the gap between services and manufacturing that we found more interesting. The Services PMI of 55.4 was lower than August’s 54.6 (but ahead of expectations of 55.2) and has now been in expansionary territory for 20 consecutive months. Conversely, Manufacturing PMI at 47.0 was lower than August’s 47.9 (and below expectations of 48.6), making this the third month in a row of contraction and the lowest level in 15 months. The gap between services and manufacturing (now at 8.4) has been widening and is now at its widest level in the 3 years since S&P Global acquired IHS Markit and began reporting on PMIs. It was noted in the release that some uncertainty due to the upcoming U.S. presidential election assisted a decline in new orders, putting pressure on manufacturing sectors. Also of note, prices charged rose at the fastest rate in the past six months, with input costs the main cause, which was growing faster in services than manufacturing.^[4]
• China gets serious about stimulus: This week China laid out a series of stimulus measures aimed at shoring up their economy and boosting their flagging residential property market. First, the 7-day repo rate was cut by 0.2% to 1.5%, and signals were given that other interest rates, such as prime loan rates and deposit rates, could see similar-sized cuts in the near term. Next, to boost bank lending, reserve rate requirements were cut by 0.5%, which should free up around 1 trillion yuan (~$142B USD), while a 500 billion yuan swap facility was introduced to help support their stock market. On the property side, existing mortgage rates are to be reduced by 0.5%, decreasing the burden on existing homeowners, and, in an attempt to stimulate transaction activity, down payments on 2nd homes will be lowered to 15% from 25% (matching primary home levels). In a press conference the following day, these measures seemed aimed at 1) preventing further decline of property values, 2) limiting new development, and 3) increasing support for white-listed projects. Overall, local stock markets reacted favorably, although enthusiasm faded as more concrete details were released, but nonetheless the CSI 300 reached its highest level since May of this year and the Hang Seng index hit its highest level since July 2023.^[5]

Real Assets, Real Insights: First, we’ll look at recent capital raising efforts in U.S. Real Estate Securities. Then, we’ll inspect the potential port strikes that look increasingly likely to occur next week and finally conclude with a regal review of one of the hottest commodities in town right now.

• Taking names and raising equity (Real Estate): To date in September, we have counted at least five U.S. Real Estate Investment Trusts (REITs) capital raises in follow-on offerings, amounting to almost $1.9B in gross proceeds. Furthermore, this is strictly equity and does not include debt offerings, where the senior unsecured market remains wide open and with all in debt costs coming down. Additionally, the IPO pipeline is growing. Frontview REIT, Inc. (FVR), a net-lease property owner, looks set to go public next week, which would be the fourth U.S. REIT IPO this year. Three more potential REIT IPOs are in the pipeline, though they could end up being 2025 activity if they do occur. Some of this activity is from non-traded REITs looking to enter the public market, which is exactly what one would expect when REITs regain their premium to private market values. Per Greenstreet advisors, U.S. REITs held an 8% premium to private market values (as of September 20th), above its 30-year average of ~3%, as REITs typically lead the private market, and we would expect this gap to compress as new transactions reflect higher private market spot prices, given the recent reduction in interest rates.^[6]
• East Coast port strike appears inevitable (Infrastructure): Port workers on the East Coast and Gulf of Mexico are all but set to strike on October 1st. The International Longshoremen’s Association (ILA), the union that represents these workers, hasn’t negotiated in good faith since July, according to a recent NLRB complaint by the U.S. Maritime Alliance, and is seeking wage increases of almost 80% over the six-year contract. To put that in context, West Coast port workers received a 32% increase in wages through their contract, which was signed just last year. Shippers have been expediting shipments for months and now appear to be reaching panic mode, with industries that maintain lean inventories (like auto and pharmaceuticals) and industries with fresh or frozen produce (bananas, fresh meat) unable to ship ahead enough product to buffer a prolonged strike. The Biden administration seems loath to use powers set forth in the Taft-Hartley Act to end a potential strike as it would risk the wrath of unions, which would be especially concerning for his party given that it is a presidential election year, but the strike could be ended in one day (with an 80-day cooling-off period) if Taft-Hartley is invoked. A strike (of any length) not only could see inflation move higher but could disrupt West Coast Port traffic as well, and many companies will need to rethink their supply chain management until the issue is resolved.^[7]
• It’s good to be the king (Commodities): But those golden crowns are getting more expensive by the day. Gold continues to set new all-time highs, with the spot price crossing above $2,685/oz and the prompt-month contract cresting $2,700 just following our review period. Retail purchases of gold have also been strong in the Asia Pacific region, both for jewelry purposes and as a store of wealth, especially with declining property values in China, while Japan has also seen notable inflows to gold. Additionally, the total known holdings of gold by ETFs have been steadily rising since bottoming in May of this year and could have more room to grow as holdings by ETFs still sit 25% below their high seen in October 2020. Gold prices are bolstered by discussions around de-dollarization and widening fiscal deficits and remain a haven during the uncertainties of the ongoing conflicts in Gaza and Ukraine as well as the upcoming U.S. presidential election. We could see gold prices move higher still as many central banks are moving towards more dovish positions and as we expect the U.S. dollar to weaken over the next 12 months.^[5]