Market index returns

Week to date since December 11, 2024 as of December 18, 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.

Market commentary:

Global equities lost a bit of their YTD shine over the week after the U.S. Federal Reserve’s (Fed) latest statement tarnished the outlook for taming inflation. The hawkish pivot signaled that the path of rate cuts will likely be slower and shallower than previously expected by the market. While not wholly unexpected given the data flow, the timing appeared to catch the market a bit offsides, sparking a sell-off in equities and a spike in the VIX, an index of expected S&P volatility, which nearly doubled to 27.7, from 13.9. The price of gold fell $95 (-3.6%), landing below $2600 for the first time in over a month. The U.S. dollar strengthened 1% against major trading partners and the price of oil rose 0.8%. Inflation break-evens tightened 3 basis points (bps) for the 5-year and 10bps for the 10-year, while high yield (below investment grade) credit spreads rose 5bps. In geopolitics, it appeared that Russia and Ukraine moved closer to potential peace talks to end the war which is nearing its three years anniversary. Ukraine’s President Volodymyr Zelenskyy, meeting with leaders in Brussels, remarked that the E.U. must work with incoming U.S. President Trump to ensure peace and raised the prospect of peacekeepers being deployed in Ukraine. The war in Ukraine continues to impact Europe’s energy prices, as we discuss later, but weather dynamics still drive most of the price volatility. Meanwhile, in the Middle East, Israel launched air strikes in Yemen in response to a missile strike on central Israel by Houthi rebels. The Houthi movement is backed by Iran and is part of Tehran’s self-described Axis of Resistance. This ongoing conflict has a direct impact on energy and trade markets as Yemen sits on the Red Sea and Houthi rebels have attacked ships passing through the vital trade route.^[1]

Against this backdrop, U.S. Treasury Inflation Protected Securities (U.S. TIPS) and Commodity Futures outperformed the broader equity market on a relative basis. Global Equities in aggregate outperformed Infrastructure Securities, Global Real Estate Securities, and Natural Resource Equities. From a regional perspective Real Estate Securities in the U.S. lagged Europe and Asia. Within the Infrastructure sector, stocks in Asia Pacific outperformed Europe and the Americas, with Communications lagging the most. Metals & Mining stocks lagged within Global Natural Resource Equities, while Agriculture companies outperformed on a relative basis. The Energy segment led Commodity Futures while Precious Metals lagged.

Why it matters: U.S. stock markets have historically experienced a “Santa Claus rally” heading into the final weeks of the calendar year, so it remains to be seen which direction the market will take after this recent sell-off. Geopolitics could still play a wild card as the U.S. government transitions to a new administration in January. There is no crystal ball to tell us what the future holds but investors should position portfolios for the outcomes they believe to be most probable. We believe Liquid Real Assets should play a strategic role in investors’ portfolios as they could provide potential diversification and return benefits in a variety of economic environments.

Macro Dive: This week, we review the latest central bank actions, the annual budget battle in the U.S., and global sentiment indicators.

• Welcome to our FED talk: The Fed’s Federal Open Market Committee (FOMC) cut rates by 25bps to 4.50%, which was in line with market expectations. The accompanying statement, however, prompted most of the market reaction as Fed officials stated they would “be more cautious” with future rate decisions. Recent data signaled that progress on bringing inflation to the 2% target was slowing as officials pushed out their timeframe for hitting that target by twelve months. The Fed’s median estimate of PCE inflation for 2025 was bumped up to 2.5%, up from 2.1%. Core PCE came in a touch below estimates for November with a rise of 0.1% MoM (vs. expectations of 0.2%), and 2.8% YoY (vs. expectations of 2.9%) The market, rightly or wrongly, believes the Fed could be factoring in the potential for tariff-related inflation. The global rate cut cycle, while not universal, has continued with participation from New Zealand, South Korea, Mexico, and Canada as global growth remained below trend.^[1]
• Budget-buster: Incoming President Trump and his fellow billionaire adviser, Elon Musk, kickstarted the budget bill drama which could lead to a shutdown of the U.S. government. Trump backed a spending bill--which ultimately failed in the House--which would have, among other things, suspended the debt ceiling for two years. The potential for additional debt was a bridge too far for many hardline conservatives who defied the incoming president and joined every Democrat in opposing the spending bill. Without a spending resolution, government funding will lapse at the end of December 20th. The original bill was expected to pass but drew the ire of Trump’s spending hawk, Elon Musk, by including disaster aid and additional sweeteners.^[1] 
• In their feelings: Service PMIs (purchasing managers index) in the UK and Germany improved marginally, reaching expansion territory, while manufacturing PMIs continued to wallow in contractionary doldrums. This followed similar themes in developed markets which continued to rely on services to drive economic growth while manufacturing remained lackluster. In the U.S., the reduction of post-election uncertainty could support future Capex and productivity gains as evidenced in the improvement of CEO capex expectation surveys. Small businesses in the U.S. have been constrained under the lagged impact of policy rates but optimism has been increasing, potentially stirring “animal spirits."^[1]

Real Assets, Real Insights: We’ll first look at the recent “Europe Property Performance Monitor” from our DWS private market counterparts. Then we will continue exploring our theme of data center developments. Finally, we will examine the geopolitical influence on the gas market.

• You’re up Europe (Real Estate): Private real estate in Europe continues to show improvement in returns at the asset level. Our DWS direct real estate colleagues released their “Europe Property Performance Monitor” for the third quarter of this year, which showed an overall positive return of 1.6% during 3Q24 (per the MSCI Pan-European Quarterly Property Fund Index) at the asset level and leading to the first positive return (+1.4%) on a year-on-year basis since the third quarter of 2022. However, given the weight of leverage and interest rates, returns at the fund level were more challenged in 3Q24, but remained in positive territory at 0.1%. By property type, hotels and industrial were amongst the strongest returners, while office remains challenged but still posted its first positive quarterly return since the first quarter of 2022. Geographically, assets in Sweden and the UK performed the best, while the Czech Republic, Ireland, and Finland lagged. Despite the positive returns in European direct real estate overall, these results lagged the listed European real estate market by a few kilometers as the FTSE EPRA/NAREIT Europe Index returned 12.3% (in euros) in the third quarter. But if the private market follows the listed real estate market as it usually does, even better days could be ahead for European real estate. To read the full report, click here.^[2] 
• MA.I. Help You? (Infrastructure): The Biden administration, via National Economic Council director Lael Brainard, released details of its supply chain review, including the possibility of making federal land available for data centers to be located closer to clean energy options. The move is part of an attempt to have a systematic approach to address the needs of industries like AI. The U.S. government is keen to keep the country in the lead of developing generative AI capabilities. A holistic approach is needed to “address land, power and permitting constraints” facing the power infrastructure needed to fuel AI development.
• Fungible Commodities: Incoming U.S. President Trump threatened to use his tariff cudgel on Europe if they didn’t close their trade gap with the U.S. by purchasing oil and gas. The U.S. is the largest global producer of crude oil and exporter of liquefied natural gas (LNG). Several governments have already begun to pronounce an increase in purchases from the U.S., hopefully to pre-empt tariffs. The EU still relies on Russia for LNG and could replace it with supplies from the U.S. Russian gas usage has been put into question as the governments of Ukraine and Russia ruled out the renewal of a key gas transit deal. Ukraine doesn’t want its war opponent Russia to benefit from selling gas to Europe via pipelines through Ukraine. European gas futures rose from the impasse.^[1]