Diversification...Anyone?

Market index returns

Month to date since January 31, 2025 as of February 28, 2025

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

Global equity markets took a turn in the middle of February to end the month weaker. Performance showed a defensive tilt as the Consumer Staples, Real Estate, Health Care and Utilities sectors outperformed the broader market, as did the Financials and Energy sectors. On the flip side, stocks in the Consumer Discretionary, Communications, Technology, and Industrials sectors lagged the broader market and posted negative performance. The Real Assets Index outperformed Global Equities on the strength of Global Infrastructure Securities, Global Real Estate Securities, and U.S. TIPS. Natural Resource Equities and Commodity Futures underperformed the Real Assets Index but outperformed broader equity markets. Credit spreads widened across the credit spectrum, with IG spreads rising 9 bps (basis points) and HY spreads rising 28 bps. For the month, the dollar was slightly weaker, as measured by the DXY index, oil prices fell to $69.76 per barrel, and gold prices continued to rise, hitting $2,858 per ounce.^[1]
 
Investors awoke from their winter slumber to send the VIX, an index of expected S&P volatility, 24% higher to 19.6. The wake-up bell was struck by potential disruptions to trade and the global monetary system which could hamper growth and corporate earnings in 2025. The U.S. administration has favored monetary penalties over incentives to coerce businesses to re-shore stateside. U.S. tariff promises appeared to materialize as the U.S. reaffirmed its commitment to implement Canadian and Mexican levies on March 4th, which would be the end of the one-month postponement. This is on top of additional measures charged on Chinese goods, broader tariffs promised on aluminum and steel, as well as global reciprocal tariffs to combat actual and estimated barriers to entry for U.S. goods and services. Also contributing to trade uncertainty was a proposal by the Office of the United States Trade Representative to charge substantial fees on Chinese-made shipping vessels which dock at U.S. ports. The fees would be scaled to the composition of Chinese-made ships in the shipper’s fleet. This would increase shipping costs, which would ultimately impact consumer prices. 

Why it matters: Facing disruption in financial markets, trade flows, and corporate revenues, investors need to stay on their toes to factor in new information and potential outcomes.

Macro Dive: We continue to monitor the potential for stickier inflation and recent weakness in soft data indicators, such as confidence measures, to see if it will materially appear in hard data. Let’s recap the key themes of February.

• On the weaker side, slowing jobs data and stickier inflation: Nonfarm payrolls in the U.S. rose 143k in January, and 151k in February, both landing below expectations. The monthly average for 2024 was refreshed to show that job growth was only averaging 166k per month, versus initial estimates of 186k. The unemployment rate ticked up to 4.1% for February, while the labor force participation rate fell to 62.4%. Initial jobless claims and continuing claims remained elevated for most of February and that didn’t fully factor in government-related job cuts. The Conference Board of Consumer Confidence index fell to 98.3, which was below expectations and below the prior reading. The Dallas Fed’s Manufacturing Outlook (level of general business activity) decreased to -8.3 points for February, well below the prior reading of 14.1, and under expectations of 6.4. Personal spending fell 0.2% in January, which was -0.5% in real terms. Both nominal and real spending data came in below estimates and worsened from the prior month’s reading.^[1]
• Landing in the positive(ish) column:  Durable Goods Orders rose 3.1% for January, which was above estimates. However, digging deeper into the details, excluding transportation, the orders were flat, and core shipments fell -0.3%, down from 0.3% in the prior period. 3 4Q GDP for the U.S. hit the mark at 2.3% quarter-on-quarter, while personal consumption rose 4.2%, which was above expectations of 4.1%. Personal Income rose 0.9% in January, which was above the prior reading of 0.4%. Finally, The Richmond Fed’s Manufacturing Index rose to 6 for February, which was above expectations of -3 and the prior reading of -4. The components of the headline index, Shipments, New Orders, and Employment, all rose to levels not seen for several years and pointed towards an expansion.^[1]
• Inflation watch: The Bureau of Economic Analysis released the U.S. Personal Consumption Expenditures (PCE) price index for January. The data came in “on the screws” as the saying goes, hitting 0.3% MoM and 2.5% YoY for headline and 0.3% MoM and 2.6% YoY for the Core measure. The Bureau of Labor Statistics reported that Consumer Price Inflation in the U.S. rose 0.5% MoM, and 3.0% YoY, in January. Both measures were ahead of expectations and an acceleration compared to December’s reading. One illustration of the costs facing consumers was the 15% rise for the price of eggs as bird flu outbreaks decimated chicken flocks.^[2]

Real Assets, Real Insights: This week we will look at recent hotel portfolio action, potential infrastructure spending in Germany, and the cost of coffee.

• Hotels (Real Estate): Hotel sales show early signs of gaining traction as several portfolio deals have been announced in 2025. Sales of hotel packages valued at least $50 million fell to a 15-year low in 2024, according to Green Street data. Capital market conditions have enabled larger transactions, as favorable financing allowed for higher leverage at lower rates. Investors have been and will continue to be selective to secure properties in attractive markets that offer reliable yields to support debt servicing. Demand for hotels could increase if consumer and business travel continue to recover.^[3]
• Mark(ed) spending (Infrastructure):  Debt-shy Germans are poised to expand fiscal spending to boost infrastructure and defense capabilities. The tentative deal reached will create a €500 billion fund to spend on transportation, housing, and electric grids, as well as loosening fiscal deficit rules to exempt defense spending. The plan requires a change to the constitution and is trying to be pushed through the outgoing parliament before the new one convenes on March 25. Companies in the energy sector welcomed the news as they have been highlighting the need for a deeper energy infrastructure to move power around the country and maximize the utility of renewable production. The private sector will need to be involved in fully funding the grid upgrades, but that will probably require modifications to the regulatory framework. The Green Party, who wants to lower greenhouse emissions, did not have input in the latest plan but their support will be needed to approve it.^[4]
• The cup half-full (Commodities):  Poor weather in Vietnam and Brazil hampered coffee production and drove a doubling of bean prices over the past year. These two countries accounted for 60% of world coffee bean production in 2022 according to the 2023 Coffee Barometer. The cost increase is causing friction between roasters and retailers. Retailers have balked at the price rises from roasters, which have tried to pass on a portion of their input cost increase. Negotiations between the parties are typically an annual event, but that schedule can change if market conditions necessitate a re-alignment. The price haggling has taken longer than usual given the size of the price move and has led to shortages in some European retailers. For now, the consumer has been spared the brunt of the increase as the coffee, tea, and cocoa component of the EU’s CPI has only risen 8% (NSA-HICP) since the beginning of 2024. In the U.S. the CPI coffee component rose 15% (NSA) since the beginning of 2024, according to BLS data.^[5]