Strong September defies the usual fall gloom
Join DWS' Chief Investment Officer Bj?rn Jesch and his team in this month’s Market Movers as they analyze the drivers behind recent market moves and discuss key trends that could shape the weeks ahead.
Defying the typical September slump warnings, both equities and bonds soared, marking the S&P 500’s first positive September since 2019 and delivering the best September for global bonds since 2016.
The fact that September went so well for both equities and bonds may have come as a surprise to those who read the market analyses by leading banks and brokers at the end of August.
Many warned against this month, which has so often disappointed in the past. But this year it delivered the first positive performance for the S&P 500 since 2019 (and the best 9-month result this century), while global bonds had their best September since 2016. This is just a reminder that ‘historical’ averages or patterns are not a good guide when making investment decisions – they are of little value in specific cases.?
It is probably also necessary to be cautious about historical comparisons in the current interest rate cut cycle, as this economic and interest rate cycle differs from previous ones in many respects. Both the U.S. and German yield curves (in 2- and 10-year government bonds) turned positive again in September for the first time in years. Historically, the rise out of negative territory has usually been followed by a recession, especially in the U.S. While that risk remains, it is not our core scenario.
In our monthly Investment Traffic Lights we analyze what this macro outlook means for the various asset classes and regions. Click ?? below ?? to read the full report.
On September 5th, DWS’ new 12-months forecasts for economic and asset class targets were formulated. Our economic base case scenario continues to assume a soft landing in the U.S. and a gradual reacceleration in the course of 2025. Elsewhere in the world economic activity is muted but not falling off a cliff.?
An important change is that, unlike in the past 20 years, China is no longer the locomotive of the global economy. In fact, it is quite the opposite: hit by the housing crisis and weak domestic demand, China is exporting its manufacturing surpluses into Europe and the Americas. Although the recently announced plethora of stimulus measures might help the domestic economy somewhat, we remain skeptical about their ability to produce a longer-term boost for China or developed markets.
Therefore, our base case scenario is very much dependent on three U.S. factors, leaving aside global geopolitical risks. First, we expect improved U.S. consumer sentiment post the election. Second, an ongoing Fed rate cut cycle that does not create new inflation worries at the longer end of the interest rate curve. And third, no major setback to the Artificial Intelligence (AI) story which keeps driving corporate capital expenditures at a high pace.?
Click ?? here ?? to read the full Investment Traffic Lights report.
As part of our series “10 Themes for 2025,” we investigate three major trends with profound underlying influence in the markets.???
First up is AI, which is creating its own reality – the huge investments being made are driving markets. The four largest Hyperscalers are now investing more than an annual $200 billion in data centers – a quadrupling since 2017.? What they fear, as Google’s CEO has said, is not investing enough and therefore falling behind their rivals. But big spending makes for big risks. The pioneers of major innovations, we point out, have rarely made the big money.? For us, as investors, that poses an important challenge: to pick out from the entire AI sector the firms whose plans might have the highest chance of succeeding.??
As AI winds itself up, the unwinding of another big trend is reshaping the market. For 793 days the U.S. Treasury yield curve was inverted, with yields on shorter maturities exceeding those on longer ones.
Traditionally this has been seen as a sign of approaching recession. And often that recession comes only after inversion ended. This time, however, we don’t expect that – though a U.S. recession does remain a risk, in our view.?We think it’s more probable that growth will continue and are looking for where best along the curve to profit in the new, more normal yield curves in the U.S., Germany and elsewhere.??
Click ???below ?? to read the theme on yield curves.
A still longer trend is shifting like a tectonic plate beneath the markets: the aging of the world’s population. At present nearly one third of Europe’s population is more than 65 years old. By 2050 the United Nations (UN) predicts almost half of Europe’s population will be elderly. People are living longer.?
So, too, must their pensions.?The implications are many for both governments and the private sector.?Bond yields may need to rise. Much may change in the healthcare and care sectors – the old will need looking after. But not all of them. Today’s older people are healthier for longer and many will engage in what we call more cheerful spending.
Click ?? below ?? to read the theme on changing demographics.
Sources: Bloomberg Finance L.P., DWS Investment as of 10/4/2024. Returns refer to the period of 9/1/24-9/30/24. *Period for oil is 9/3/24-10/3/24 due to high volatility.?
Any mentions of specific properties or securities are for illustrative purposes only and should not be considered a recommendation.?Past performance is not a guarantee of future results. The opinions and forecasts expressed are those of the authors and may not come to pass. Forecasts are based on assumptions, estimates, views and hypothetical models or analyses, which might prove inaccurate or incorrect.? Forecasts are not a reliable indicator of future returns. DWS does not intend to promote a particular outcome to the U.S. election (or other countries’ elections) due to take place. Readers should, of course, vote in the election as they personally see fit. All investments involve risks, including potential loss of principal. Index returns do not reflect fees or expenses, and it is not possible to invest directly in an index.?
DWS Glossary?
Artificial intelligence?is the theory and development of computer systems able to perform tasks normally requiring human intelligence?
Hyperscalers are large cloud service providers, which can provide services such as computing and storage at enterprise scale.?
Inflation?is the rate at which the general level of prices for goods and services is rising and, subsequently, purchasing power is falling.?
The final payment date of a financial instrument is its?maturity.?
A?recession?is, technically, when an economy contracts for two successive quarters but is often used in a looser way to indicate declining output.?
The?S&P 500?is an index that includes 500 leading U.S. companies capturing approximately 80% coverage of available U.S. market capitalization.?
A?yield curve?shows the annualized yields of fixed-income securities across different contract periods as a curve. When it is inverted, bonds with longer maturities have lower yields than those with shorter maturities.
as of 10/4/24 102938_2.2 (10/2024), 102939_2.1 (10/2024)