CIO View

Happy anniversary, bull market! But are you done yet?

The bull market on Wall Street is a topic of hot discussion. Has the movement gone too far by now? Are there any indications that it will continue or even accelerate? What is the effect of the interaction between economic development and the corresponding reactions of the Federal Reserve? What about China? In any case, it remains an exciting time. And as time goes on, we get more and more pieces of the puzzle for our perspective. But ultimately – as is unfortunately always the case – only in retrospect will we be able to see whether the many signposts have not sent us in the completely wrong direction.

But for now, hooray. This weekend marks the second anniversary of the current bull market on Wall Street. Since the low in October 2022, the S&P 500 has risen by almost 67%.(1) In 2024, the stock market barometer has already gained around 22% and set 45 record closing prices.(1) Interestingly, however, none of the previous 44 records were accompanied by such increased volatility as the close on Friday. A glance at Bloomberg shows that last week was the first week of the year in which the VIX closed above 20 every day.(1) It therefore does not seem particularly daring to expect increased nervousness and thus higher volatility, at least in the run-up to the U.S. elections (and probably beyond).

If Wall Street's trading history is any guide to the future, this bull market is far from over. At two years, we are well below the historical average of five and half years. And the performance to date is also far from the average gain of around 180%.(2) So is everything okay?

At least the sentiment is. According to the American Association of Individual Investors (AAII), you have to look hard to find the bears on Wall Street. In its latest survey, investor pessimism (the expectation that stock prices will fall in the next six months) fell sharply to its lowest level since December 2023. At the same time, pessimism has fallen for the eighth time in nine weeks, according to AAII.(3) At the same time, optimism is on the rise. Optimistic sentiment has now been well above its historical average for 49 weeks.

But then there is the following report: For the third week in a row (and the ninth week in 10), U.S. money market funds saw inflows, pushing total assets under management to a new record high of USD 6.474 trillion. A similar picture can be seen in U.S. banks, where total bank deposits grew for the third week in a row, bringing them back well above the levels seen before the outbreak of the regional banking crisis in the United States. So are investors preferring to wait and park their money in the short term after all? In any case, it has been apparent for about two weeks that the liquidity that drove U.S. equities to their record highs is easing somewhat. So, there are some pieces of the puzzle that could paint a less optimistic picture.

And of course, there are many other issues that tend to support a more sceptical view on Wall Street. For example, the increasingly tense geopolitical situation in many regions or the rather disappointing stimulus announcements in China, given the high expectations of the market participants. The question also arises as to whether the development of U.S. Treasuries is currently in line with the impressive performance of Wall Street, or whether a completely different message is being sent here. Of course, investors should be pleased with the performance of equities to date. However, it also seems advisable not to blindly follow the preachers of eternal bull markets.

But for now, we are starting a new trading week. Starting with the U.S., this week's economic releases will focus on retail sales and industrial production on Thursday, which should provide further insight ahead of the Fed's meeting on 7th of November. In the Eurozone, the highlight of the week is of course the European Central Bank (ECB) on Thursday, where a further 25bp rate cut would not really surprise the markets. Other European data releases include the ZEW survey for Germany on Tuesday and the trade balance for Italy and the Eurozone on Thursday.

?

1. Source: All market data, unless otherwise stated, Bloomberg Finance L.P. as of October 13, 2024.

2. Source: The bull market is 2 years old. Here's where Wall Street thinks stocks go next., msn.com as of October 12, 2024.

3. Source: AAII Sentiment Survey shows pessimism is on the way down, investing.com as of October 11, 2024.

Forecasts are based on assumptions, estimates, views and hypothetical models or analyses, which might prove inaccurate or incorrect. Past performance is not a reliable indicator of future returns. Source: DWS Investment GmbH as of 10/14/24.