Market index returns

Week to date since November 06, 2024 as of November 13, 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:

The prophetic words of Heraclitus still ring true almost 2,500 years later as the world digests the potential changes to economic, political, military, and social policies by the incoming U.S. administration. Global equities rose as stock markets continued to rally post the U.S. election before tiring out into the end of our review period. U.S. stocks performed the best as signs of trader optimism and bullish sentiment were found in the latest survey figures from the American Association of Individual Investors. Their optimism was based on the potential for higher corporate growth driven by President-elect Donald Trump’s agenda. Conversely, stocks in Asia and Europe suffered as the impact of potential tariffs filtered through markets, as well as the currency effect of U.S. dollar strength over the period. Corporate credit spreads also tightened, especially those of sub-investment grade companies who tend to be more growth-sensitive, a market segment with a higher percentage of energy companies as compared to the investment grade market. Stock volatility subsided with the VIX settling down to a level 14.02, after bouncing around in the low-to-mid 20s in the days immediately surrounding the election. However, bond vigilantes highlighted their contribution to the system of checks-and-balances by driving up 30-year Treasury yields to 4.64% on concerns of long-term inflation and the U.S. budget deficit outlook. Gold prices ended the period at roughly $2,573 per ounce, cooling off from heights reached at the end of October. Oil prices also ended the period lower following knee-jerk selling post-election.^[1]

Against this backdrop, Real Assets were slightly negative as Natural Resource Equities weighed down performance the most, followed by Commodity Futures. Global equities outpaced Global Infrastructure and Real Estate stocks. Waste companies in the Americas led Infrastructure performance, followed by Oil Storage & Transportation companies in the U.S. and Canada. American Utilities and infrastructure companies in Japan were the only other areas to post positive performance. Within Global Real Estate Investment (REIT) stocks, the U.S. led the way with positive performance and leadership from the residential, regional malls, self storage, and data centers segments. Commodity Futures were led by strength in cocoa, coffee, and natural gas but overall performance was weighed down by palladium, wheat, platinum, crude oil, and sugar. Metals & Mining companies hampered performance of Global Natural Resource equities while Agriculture products outperformed on a relative basis, despite negative absolute returns.^[2]

Why it matters: With the U.S. election now behind us a portion of uncertainty has been clarified. Investors have begun positioning their portfolios for the impact of a Republican sweep of the presidency and both Houses of Congress. It will be some time before the new government is formed with appointees confirmed, and even more time for policies to be enacted. There are still many unknowns to be sorted, as well as ongoing global conflicts, all of which could drive spikes of volatility. We can’t be certain how everything will play out, which is why we continue to advocate for a balanced portfolio that includes an allocation to real assets.

Macro Dive: This week, we discuss U.S. economic data and central bank actions, as well as global politics.

• Balancing the scales:  U.S. Inflation, as measured by both the headline and the core Consumer Price Index, met expectations for the month-over-month and year-over-year prints. Headline CPI was 0.2% month-over-month and 2.6% year-over-year. Core inflation, which excludes the volatile food and energy components, was a bit higher at 0.3% month-over-month and 2.6% year-over-year. Producer prices (PPI), which can filter to consumer prices, rose by similar magnitudes but were slightly above expectations. PPI Final Demand, similar to headline CPI, was 0.2% month-over-month, which was at expectations. However, excluding food and energy the figure also rose 0.3%, ahead of expectations of 0.2% for month-over-month, and 3.1% year-over-year, versus expectations of 3.0%. Employment, the other side of the Fed’s mandate, was stable this month. Initial jobless claims for the period ending November 9th were 217k, versus expectations of 220k, and lower than the previous figure of 221k, which was slightly elevated due to weather impacts. Continuing claims for the period ending November 2 also slowed to 1873k, matching expectations and lower than the previous print of 1892k. Taken together, along with recent comments by Fed Chair Jerome Powell, these data points prompted the market to lower expectations for further rate cuts in December as inflation remained stubborn while jobs data was stable.^[3]
• Some go this way, and some go that way:  Mexico’s central bank, Banxico, cut short rates by 25bps to 10.25% as inflation provided room for its third cut of the cycle, which started with rates at 11.25%. Banxico officials have wrangled inflation to sub-4%, closing in on its 3% target, which provided further room for easing to offset economic weakness. The market is expecting the bank to keep the cut pace steady at 25bps clips, providing room to adjust given the potential for upside inflation surprises. Mexico’s easing follows a similar move by the U.S. Federal Reserve which cut interest rates 25bps at their last meeting on November 6th, which was fully overshadowed by U.S. elections. The Bank of England also cut by 25bps, to ease monetary conditions, in their last meeting on November 7th. One of the few banks going the other way was Brazil’s central bank which hiked its policy rate by 50bps to 11.25% in its last meeting on November 6th and is expected to follow up with another 50-75bps of hikes by year-end to combat inflation.^[4]
• Oh Snap:  On November 6th Germany’s ruling coalition crumbled as disagreements over fiscal and economic polices came to a head. Chancellor Olaf Scholz from the Social Democratic Party sacked Finance Minister Christian Lindner (Free Democratic Party), necessitating a call for a confidence vote which will take place on January 15th. If Scholz loses the Jan. 15 vote then elections will have to be held in March, six months ahead of schedule. The leader of the opposition party (CDU), Friedrich Merz, is pushing for elections to occur even earlier. German leaders are struggling to address poor economic growth as the economy is forecast to contract by 0.2% in 2024, following a decline of 0.3% in 2023. Lindner’s firing was prompted by his paper which proposed corporate tax cuts, reductions in welfare benefits, and a rollback of climate regulations. Lindner’s paper outlined these as solutions to address the country’s economic problems including: declining competitiveness and productivity, a lack of investment, as well as higher energy and labor costs. Apparently these FDP proposals would be a bridge too far for the other parties (Greens and SPD) to accept.^[5]

Real Assets, Real Insights: In the following segment we will discuss Spanish tax changes which could impact REITs, Infrastructure moves in Canada, and Tech’s complication of broader green energy goals.

• The tax man cometh:  In Spain, the country’s Sumar (left-wing) and Socialist party reached a tax agreement that would eliminate lower taxes rates for REITs, known as Socimis. The move was part of a broader pact to make fiscal changes. If the agreement is enacted the Socimis would be subject to a corporate tax rate of 25%, which is well ahead of the current 0%. This proposal, if enacted, would reduce capacity for dividend outlays, cash generation, and further investments. The move adds uncertainty to the Spanish market until the final legislation is proposed and approved. The ending is far from certain as the two parties need support from various smaller segments of a fragmented party system in Spain. While Spain constitutes a small part of the global REIT market, this development is worth watching as policy makers look for new revenue sources.^[6]
• Trudeau barges in: Canadian Prime Minister Justin Trudeau’s government weighed in on a labor dispute. The government instructed the independent labor board to end the lockout of some of Canada’s largest ports. The shutdowns have caused a backlog of goods and disruptions to economic activity in the country. The government was able to intercede given powers held by Labor Minister Steven MacKinnon under the Canada Labor Code. The move could threaten relations between the Liberal government and labor groups. Unions representing the dockworkers vowed to fight the rulings in the courts.^[7]
• Tech’s Green credentials getting tarnished?  As we’ve written about previously, tech firms have increased demand for clean energy to operate electric-hungry AI (artificial intelligence) data centers. These data centers demand higher consumption rates versus traditional centers. Dominion Energy Inc.’s CEO Bob Blue, commented how this demand growth challenges the goals of the green energy transition. Dominion is based in Virginia, a state at the center of the growing data center industry. Virginia state law also requires that Dominion exclusively generate electricity from renewables by 2045, but also provides flexibility to ensure grid reliability. The company estimates that its electric demand will double by 2039 and has been transitioning to gas-fired plants as a bridge until its battery storage and solar and wind generation is brought to scale. CEO Blue also raised the point that potential changes to the Inflation Reduction Act could impact the affordability of its projects, given the use of clean energy tax credits.^[8]