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 continued to climb higher in September after a rough patch in the first week of the month. Stocks quickly rebounded from weak payroll and manufacturing data in the U.S. early in the month and moved higher for the next several weeks given a plus-sized rate cut from the U.S. Federal Reserve (Fed), fresh economic stimulus from China late in the month, and other encouraging news, sending many stock market indices, including the MSCI World Index, to new all-time highs. Then October happened. Halloween typically marks the end of October, but things turned spooky at the start of the month this year. A crippling strike by port workers on the East Coast and Gulf of Mexico started on October 1st and held supply chains and shipping cargo hostage for a few days. That same day, Iran launched a missile strike on Israel in retaliation for earlier events, upending stock markets, sending volatility higher in both equity (VIX Index) and fixed income (MOVE Index) markets, and causing crude oil prices to spike.^[1]

All Real Assets classes, with the exception of Treasury Inflation-Protected securities (TIPS), bested the global equity market’s return in September. Commodities led the pack with strong returns in Agriculture, Industrial Metals, and Precious Metals. Global Real Estate securities followed with strength out of the Asia Pacific region (aside from Japan), Australia, and U.S. data centers. Gains were slighter in Global Infrastructure securities and Natural Resource equities. TIPS finished the month with positive returns but lagged the broader equity market. Over the first three days of October, Real Assets have seen Commodities and Natural Resource equities move higher, while Global Real Estate securities and Global Infrastructure securities have declined along with the broader market.^[2]

Why it matters: The port strike appears to be resolved as we write with a tentative deal reached, but it will still take a few weeks to unwind the backlog of cargo, and it’s not a definitive deal yet, rather an extension of the current contract to January. We don’t know if the current Middle East conflict will broaden into an all-out regional war, but we do know Israel has vowed to retaliate, indicating the situation is not likely to simmer down anytime soon. We have no idea whom the next U.S. President will be, and while it’s narrowed down to two choices, their platforms and expected policies are as different as could possibly be. Yet, a strong jobs report from the U.S. looks to undo the initial stock slide in the U.S. Will October be the third month in a row that starts on a down note but achieves new highs by month-end, or are there ghosts and goblins to still appear? With all this in mind and so many other unknowns, is your portfolio set to handle whatever may come next, good or bad?

Macro Dive: This week we’ll review the latest employment data in the U.S. and what it might mean for future Fed action. Next, we’ll look at Institute of Supply Management (ISM) data that also provides some caution on employment. Then, we’ll give a recap of the situation in the Middle East that is keeping us on edge.

• Jobs wow: September’s change in non-farm payrolls showed 254k jobs added, the highest print in six months and crushing estimates of 150k. Furthermore, the 2-month net revision showed 72k more jobs were added in July and August than initially reported. And if that wasn’t good enough, we saw the unemployment rate drop to 4.1% from 4.2% in August. Hourly earnings also picked up, exceeding expectations and the prior month, growing by 0.4% month-on-month and 4.0% year-on-year in September. Earlier in the week, in what may have been a foretelling indicator of all this, JOLTS showed 8.04M job openings in the U.S. during August, above estimates of 7.69M and growing from July’s upwardly revised 7.71M openings. While markets rallied in the wake of the jobs reports, almost any hopes of another 50 bps cut by the Fed evaporated, with Fed Funds futures indicating a 25 bps cut in November appears all but certain. Longer-term interest rates jumped too, with the U.S. 10-year Treasury yield climbing as high as 3.97% from its prior day’s close of 3.85% and September’s closeout of 3.78%.^[2]
• ISM says services hot, employment not: ISM Purchasing Managers’ Index (PMI) data for September was released this week for both Services and Manufacturing. Manufacturing PMI was released first, and at 47.2 matched August’s read, but a touch short of expectations of 47.5. However, Manufacturing Employment fell to 43.9 (the 2nd lowest read in four years) versus expectations of 47.1 and contracting faster than August’s 46.0. Only 2 of 18 manufacturing industries showed employment growth during the month, food & beverage and machinery. New Orders in manufacturing came in at 46.1, which was better-than-expected and higher than August, but still contracted overall. ISM Services data followed with an index print of 54.9, higher than expectations of 51.7 and August’s 51.5. While New Orders in services picked up to 59.4, the highest level since February 2023, it’s worth noting Services Employment slipped back into contraction at 48.1 after two months above 50. Prices Paid for services was also a bit concerning at 59.4, above estimates of 56.0 and accelerating from August’s 57.3 Pricing of supplies for services was noted as an issue, and one where the current strike by East Coast port workers is not likely to add relief in the near term.^[3]
• Tit-for-tat: Conflict in the Middle East continues to evolve as Israel expanded military operations into Lebanon in addition to its fight against Hamas in Gaza. Strikes in Lebanon’s capital of Beirut targeted Iranian-backed Hezbollah, which has been designated a terrorist organization by the U.S. and has been a persistent threat to Israel’s northern border by launching rockets and conducting small-scale attacks. The Israeli military assassinated Hezbollah’s leader Hassan Nasrallah on September 27th with an airstrike on the group’s headquarters. Subsequently, Iran launched its second large-scale missile salvo against the Israeli state in retaliation. The Iranian missile attack was deemed ineffective as Israeli defenses, in coordination with U.S. military support, were able to intercept most of the projectiles before they could cause material damage. The Israeli government has promised a strong response to the missile attack. Financial markets remain sensitive to the potential for the war to expand and impact oil production and shipping in the region.^[1]

Real Assets, Real Insights: First, we’ll look at a recent joint venture in the data center space aimed at providing more capacity for artificial intelligence (AI). Then we’ll look at a deal in the communication infrastructure space that crosses the public and private markets. Finally, we’ll review what’s sending crude oil proves skyward to date in October.

• That’s a big joint venture (Real Estate): Equinix, Inc. (EQIX), the largest data center real estate investment trust (REIT) by market cap, recently announced a joint venture with GIC (Singapore’s sovereign wealth manager) and Canada Pension Plan Investment Board (CPP Investments). EQIX will own 25% of the venture, while GIC and CPP will each own 37.5%, and together they expect to raise and invest over $15B of capital, including yet-to-be sourced debt. The intent of the joint venture is to acquire new land and build state-of-the-art hyperscale data centers on multiple campuses, each of 100 MW or greater across the U.S. These new facilities should eventually add 1.5 GW of new capacity for hyperscale datacenter customers. The demand for new hyperscale facilities is being driven primarily by AI and cloud growth. The joint venture is expected to close before the end of the year, once regulatory approval is received, and while no timeline for building these new data centers is given, we ponder where the additional electrical power capacity will come from as it has been a limiting factor in new data center development.^[4]
• Tower power (Infrastructure): On the final day of September, Verizon Communications Inc. (VZ) announced a deal to transfer control of over 6,300 wireless towers to Vertical Bridge for ~$3.3B. Structured as a sales-leaseback, Vertical Bridge will obtain the exclusive rights to lease, operate, and manage these towers spread across all 50 states and the District of Columbia. VZ will lease back the towers for at least 10 years and has options to extend the lease for up to 50 years. While Vertical Bridge is free to lease any remaining capacity on the towers, VZ retains some rights on the towers for additional space and future use. This is not the first deal VZ has struck with Vertical Bridge, as the pair also have an existing build-to-suit joint venture in an effort to drive down VZ’s tower-related costs and provide greater vendor diversity. Vertical Bridge is the largest private owner of communications infrastructure in the U.S., but it should be noted that Digital Bridge Group, Inc. (DBRG), a listed REIT that focuses on managing assets related to digital infrastructure, holds a controlling interest in Vertical Bridge through a combination of direct investment and its investment funds.^[5]
• Crude oil prices spring (Commodities): The situation in the Middle East has sent crude oil prices shooting higher in the first days of October. WTI crude oil and Brent crude oil were among the worst commodity performers in September, with their prompt-month futures contracts falling 6.2% and 6.0%, respectively. However, not even four trading days through October, those same contracts are both up over 10%, with Brent quickly closing in on $80 per barrel. Israel has vowed to respond to the recent missile attack from Iran, and while U.S. President Biden indicated Iranian nuclear facilities should be off limits to such retaliation, he stated that discussions were underway to allow strikes on oil infrastructure in Iran, although the decision would ultimately be up to Israel. Iran currently produces about 3.3M barrels of oil per day, and any attack on their infrastructure or escalation would risk oil prices moving higher yet. However, using recent history as an example, the market will typically overshoot on price to the upside. If no follow-through occurs that results in barrels being removed from the market, the risk premium will gradually begin to dissipate, especially as there are large amounts of spare capacity sitting on the sidelines.^[6]