Market index returns

Year to date since December 31, 2022 as of December 31, 2023

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.

• U.S. Federal Reserve (Fed): The Fed hiked policy rates four times in 2023, bringing the total number of hikes this cycle to eleven, which took the Federal Funds target rate (upper bound) from 0.25% in early 2022 to the present rate of 5.5%. The last increase occurred in July, and the Fed has opted to keep rates steady at their last three meetings. The next move is largely expected to be a cut, which was reinforced by the Fed’s most recent dot plot, which indicated three cuts in 2024, and could be further evidenced by the Core Personal Expenditures (Core PCE) falling from 5.1% on a year-on-year basis in November 2022 to 3.2% in November 2023. While we won’t see another policy decision until the final day of January, the futures markets assign about a 65% chance a cut will occur by the March meeting and greater than 90% odds of a cut by May. 
• Other Central Banks: In 2023, the European Central Bank (ECB) hiked policy rates six times, bringing the total number of hikes this cycle to ten, which took the ECB Deposit Facility from -0.5% in 2022 to 4.0% at present. The last hike occurred in September, and their next move is believed to be a cut starting in either spring or early summer of 2024. However, recently released eurozone inflation data showed a pickup in headline CPI, ramping to 2.9% in December from 2.4% the month prior, though core CPI dropped 20 bps to 3.4%. Meanwhile, in the UK, the Bank of England (BOE) increased their main interest rate by five times in 2023, bringing the total number of hikes this cycle to 14, which increased their rate from 0.1% in late 2021 to 5.25% at present. Their last hike occurred in August, and they are also expected to start easing in the first half of 2024. Finally, we would note the Bank of Japan has kept their policy rate the same at -0.1% since early 2016, and while they did make some tweaks to their yield curve control bands in 2023, there’s a chance (<40%) we could see their first rate hike in 8 years during 2024.
• U.S. Employment: This has been a persistent bright spot for the U.S. economy, but some softening has occurred over the course of 2023 as the effect of Fed rate hikes has taken hold. The unemployment rate ended 2022 at 3.5%, and after initially falling to 3.4% in January, ended 2023 at 3.7% after hitting 3.8% for a few months in the fall. Job creation has slowed as well in 2023. While January started with a ripping 504k new jobs (after revision), only 216k jobs were created in December (and June and October barely saw 100k), in aggregate, 2023 saw 3.0M jobs created compared to 4.9M in 2022. We would also note the shrinkage of job openings (as measured by the JOLTS report), as 2022 ended with 11.2M openings compared to the most recently available data for November 2023 of just 8.8M. Finally, initial and continuing jobless claims have slowly been picking up, and while still relatively tame, these key metrics do indicate there have been more layoffs this year and it is taking a longer time to find a job at the margin.
• Middle East tensions rise: The October 7th attack by Hamas on Israel shocked the world. Israel swiftly retaliated, vowing to eliminate Hamas, and has since occupied large parts of the Gaza Strip. Additionally, events in other parts of the Middle East are adding to the regional strain. ISIS recently took responsibility for a bombing in Iran that killed nearly 100 people; Houthi rebels from Yemen have been attacking ships in the Red Sea on an almost daily basis; and the U.S. has launched airstrikes on Iranian-backed militant groups in Iraq following attacks on U.S. military personnel stationed in Iraq and Syria. These situations all remain fluid, but the most immediate ramification is that the Red Sea is no longer considered safe, and some shipping companies are choosing to travel around Africa instead, which will lead to increased delays and higher costs.

• Global Real Estate: U.S. and Global listed REITs started the year on a positive note, rising swiftly through January before hawkish comments from central banks, rising interest rates, and a short-lived banking crisis sent them downward in February and March. While there was some recovery by the time July ended, both found new lows in October, which nearly coincided with peak rates as the U.S. 10-year Treasury yield briefly surpassed 5%. Perhaps most interestingly, U.S. REITs rallied 24.1% from their October low through the end of the year (as 10-year Treasury yields fell almost 120 bps), hitting new highs for the year in late December and ending the calendar year in positive territory. Global REITs rallied an impressive 23.0% over the same period, also finishing the year with positive gains but failing to recapture their February high, weighed down by Hong Kong property stocks. For 2024, we expect that private real estate may still need to incur some write-downs in their appraised values to match market pricing, while REITs are already starting to rebound. We expect to see some reacceleration of earnings growth in the back half of 2024, a positive fundamental reinforcer, but we will also be closely watching the volatility of interest rates given how correlated REIT performance was to rate movements during 2023.
• Global Infrastructure: Listed infrastructure securities climbed early in 2023, hitting their high for the year in early February, before succumbing to a stronger U.S. dollar and surging interest rates. As rates began to retrace in March on economic growth concerns and a brief banking crisis, infrastructure securities found their footing and started to rise again. After oscillating between positive and negative territory for most of the spring and summer, infrastructure was again hit as real interest rates surged, with U.S. 10-year real rates climbing over 100 bps to around 2.5% in October from July. Infrastructure securities found their low for the year in early October but climbed 16.7% into year end, finishing in positive territory. Overall, we were impressed with the resiliency of the broader economy in the face of rising real rates, yet it took a toll on some of the more interest rate-sensitive sectors, such as utilities and communications. Looking forward to 2024, we believe declining rates could remain a tailwind (as seen in November and December of 2023) but will keep a sharp focus on sector fundamentals and valuations as there will be distinct winners and losers. We view infrastructure as an attractive asset class given its current valuations relative to bonds and the broader equity markets and think that select companies in the utility sector, communications, transports, and energy infrastructure will create opportunities for strong returns in 2024.
• Global Natural Resources: Similar to many other asset classes, natural resource equities started the year with strong returns, finding their peak in late January, before falling due to economic growth concerns, higher interest rates, and hawkish commentary from the Fed on reignited inflation woes. Natural resource equities rebounded into April as fears of the short-lived banking crisis faded, but once again pulled back on the resurgent economic and rate concerns, finding their low for the year on the final day of May. The group began to climb in June and again logged robust gains in July as fears of recession in the U.S. were replaced with optimism that a soft landing might be within reach. Natural resource equities stayed in a tight pattern for late summer and early fall before climbing in November and December on falling interest rates to end the year with modest positive gains. Despite overall gains for the year, we would highlight sharp bifurcation within the asset class as steel producers climbed almost 40% with iron ore prices rising steadily for most of the year, while agricultural chemicals fell nearly 20% given falling fertilizer prices. We expect natural resource producers to stay tied to their underlying commodity prices (more on that below) in 2024, which could be largely impacted by demand from China. Additionally, while we do expect global economic growth to slow in 2024, we also expect to see normalization of demand in several areas and the end of the recent destocking cycle, which should be beneficial to natural resource producers.
• Commodities: Overall, commodities were the only Real Assets class to end the year with losses. The year started on a positive note, with commodities finding their high for the year in January, but then quickly headed south. Concerns about demand (particularly from China) and expected slowing broader global economic growth sent prices lower until the group found a bottom in late May. While there was some recovery through summer and early fall, prices again retreated and even saw a sharp sell-off in early December. Due to the huge difference in not only returns but also fundamental drivers, we thought it would be good to review each major complex separately below.
  • Energy: If we said it was a tough year for natural gas, we would be understating things. Natural gas dropped out of the gate in January, and after a brief rise in February on a winter storm in the U.S., resumed its downward trend through May, and while steady through the summer months, continued its descent in November and found a low for the year in mid-December. The net total damage was a decline of about 65%, which we would blame on excess supply, full inventories, and atypically mild weather. Crude oil had a wild ride as well, with a bearish start to 2023 and pricing lower early in the year as inventories built up, but then OPEC+ and Saudi Arabia unilaterally cut production in summer, which jacked up prices. Inventories began to build again (with Iranian supply evading sanctions and coming back to market), leading to a decline in the final quarter of the year, which resulted in only a minor aggregate loss for the calendar year (~2%). For 2024, we see limited upside near-term for natural gas, although weather remains an important and largely unpredictable factor. For crude oil, we are cautious to see the year start with ample supply, but also envision the market tightening toward the end of 2024. Demand from China remains a wildcard, yet we already are seeing improved Chinese oil import quotas to start 2024 (though this could be due to the availability of relatively cheap crude oil now),
  • Industrial Metals: This group also had a rough 2024. A positive start in January quickly reversed course and never recovered, with the bulk of losses coming in February through May. There was a small upswing in the final weeks of December, bouncing off lows for the year, but the group ended down about 9% for the calendar year. Lackluster economic growth and faltering property markets led to poor demand for much of the year. Nickel fell the most and even suffered from a scandal (fake shipments at the London Metal Exchange). Copper was the only industrial metal to rise for the year, and this was largely driven in the fourth quarter when one of the largest copper mines in the world was closed in Panama when a contract was ruled unconstitutional. Overall, for 2024, the key will be to what extent does Chinese economic stimulus boost demand, though we remain pessimistic on their property markets, and hence associated construction materials, such as steel and zinc.
  • Precious Metals: As a group, precious metals hit their low in March and a high at the start of December, ending the year in positive territory, but we really need to distinguish between various metals. Gold drove the positive returns and largely followed Fed sentiment over the year, down on expectations of rate hikes and up in the dovish seasons, but also maintained its safe-haven charm throughout. As rate hikes appeared to have concluded, gold closed a month (November) and a year above the elusive $2,000/oz level for the first time ever and came within a whisper of $2,100 in late December. Palladium, on the other hand, declined steadily over the year as inventory destocking in the auto industry and overall poor demand sent the metal down 37% for the year. The relative action for silver and platinum was rather tame. Silver, having some industrial uses and being in supply deficit, was essentially flat for the year, while platinum was down just 4%, affected by many of the same issues as palladium but benefiting from its role as a cheaper substitute for palladium.
  • Agriculture: Agriculture commodities ended the year with slight losses but were also whipsawed over the year. The low occurred at the tail end of May, only to spike higher in June and July (and into positive territory) as poor weather and regional droughts pushed expected crop yields lower. Concerns eased in late summer, and overall prices retreated. However, the dispersion within agricultural commodities was notable. Cocoa was the winner, with prices rising by almost 70% for the year as poor weather and crop disease in West Africa drove prices to all-time highs. On the other end of the spectrum, wheat was the laggard, falling about 26% as markets largely discounted Black Sea corridor supply risks. For 2024, we are bullish on wheat, corn, and cotton due to expected tightening of global supplies, while we are most bearish on soybean meal.