Market index returns

Week to date since January 31, 2024 as of February 7, 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.

• 7 Celestial bodies lead markets to new high: By the close of our review period, the MSCI World Index, which we often refer to as the “broader global equities market,” hit an all-time high, surpassing the previous peak achieved in January 2022. Peeking under the hood, we find that out of the 1,480 constituents (as of January 31, 2024), just 7 companies make up over 19% of the index. These 7 names probably come as no surprise and have been colloquially named the “Magnificent 7”; they are Apple, Microsoft, NVIDIA, Amazon, Meta Platforms (fka Facebook), Alphabet (fka Google), and Tesla. Year-to-date returns for these stocks range from 41.6% for NVIDIA to -24.5% for Tesla, and given their large weighting in the MSCI World Index (and an even greater weighting in the S&P 500), they are likely to drive equity index returns for the foreseeable future. Nonetheless, we are impressed with the returns of the broader equity markets so far this year, especially given that longer-term interest rates have been on the rise again, with the U.S. 10-year Treasury yield rising 21 bps to 4.12% over the past week and climbing higher as we write.
• Services sector looks good In So Many ways:  Following better-than-expected ISM Manufacturing data last week, new ISM Services prints for January also surprised to the upside and exceeded December’s levels. The ISM Services PMI Index hit 53.4 in January, above estimates of 52.0 and 50.5 in December. There have now been 13 consecutive months of expansion (above 50), and the service sector has grown in 43 of the past 44 months. The breadth of the survey was notably strong, with Prices Paid at 64.0, Employment at 50.5, New Orders at 55.0, New Export Orders at 56.1, Imports at 59.9, Supplier Deliveries at 52.4, Backlog of Orders at 51.4, Inventory Sentiment at 59.3, and Business Activity at 55.8. The lone exception was Inventories, which at 49.1 contracted for the second month in a row, with respondents indicating they were in destocking mode and heading to pre-pandemic levels. Overall, we find these positive data points continue to support a soft landing scenario and are prolonging the likely timing of the U.S. Federal Reserve’s (Fed) first rate cut.
• Enter the Dragon: The Broker Butcher: In a script almost made for the movies, China replaced its chief securities regulator this week in an attempt to restore confidence in its flagging equity market. Wu Qing, who previously served as the chairman of the Shanghai Stock Exchange and was nicknamed “the Broker Butcher” for his crackdown on risky traders in the mid-2000s, was appointed chairman and party chief of the China Securities Regulatory Commission. Mr. Wu will take over the commission just as China prepares to celebrate its Lunar New Year and enter the Year of the Dragon. He has his work cut out as the Hang Seng Index and CSI 300 Index are both down ~40% over the past three years, but luckily for Mr. Wu, the Chinese stock markets will be closed through February 17th for the New Year celebrations, granting him more time to shore up his plans. Over the past 100+ years, the Year of the Dragon has on average been the second-best year for stock market returns among the 12 Chinese astrological signs. Granted, we will be leaving the Year of the Rabbit, which has held the #1 spot. We will wish Mr. Wu the best of luck as we enter the Year of the Wood Dragon, which is believed to impart growth, progress, and abundance.

• This too shall pass (Real Estate):  ln recent days, U.S. Treasury Secretary Janet Yellen expressed concerns about U.S. commercial real estate, while Fed Chairman Jerome Powell went one step further and stated it’s “a problem we’ll be working on for years,” referring to the stress that could be placed on smaller and regional banks. Some would point to the recent woes at New York Community Bank, whose share price has plunged 60% since January 30th, as signs that the banking crisis from March 2023 is resurfacing, though we would note that New York Community Bank bought billions of dollars of assets from failed Signature Bank last year, which are likely the sources of their woes, and they have outsized exposure to rent-regulated apartments in NYC, which have plunged in value. Such problems aren’t limited to the U.S., with the European Central Bank (ECB) recently warning banks they may face higher capital requirements if they don’t appropriately manage their commercial real estate exposure. Importantly, listed real estate could benefit from a period of consolidation. Balance sheets are healthy, and listed real estate companies have access to unsecured debt markets that aren’t readily available to most private equity players. Recent examples of opportunistic activities include buying back debt well below par and buying out the equity stakes of joint venture partners at attractive yields.
• Big oil sees big profits (Natural Resources):  It was a big week of earnings news from the oil and gas supermajors, as ExxonMobil, Chevron, Shell, and BP all reported 4Q and full year 2023 results. All four reported earnings per share results that handily beat consensus estimates. There was plenty of talk on their calls about returning capital to shareholders, with share repurchases both for last year and the future measured in tens of billions of dollars for each company, and one even recently increased their recurring dividend rate. The positive results weren’t limited to just the big names, as many smaller players posted similar positive earnings surprises, increased production, and share repurchases. We would also note that Warren Buffet continues to be interested in the oil space, as a recent SEC filing showed Berkshire Hathaway increased its stake in Occidental Petroleum in the first few days of February, picking up an additional 4.3M shares and bringing its overall ownership of Occidental to 28.3%.
• Grabbing more gold than a 49er (Commodities): As the World Gold Council recently reported, 2023 was “another year of blistering central bank buying.” The net purchases by central banks in 2023 of 1,037 tonnes fell just short of the record set in 2022, with China, Poland, and Singapore being the largest buyers last year. Even with gold hitting a record price in 2023, jewelry usage was an even larger factor than central bank buying last year, consuming 2,093 tonnes of gold, about on par with 2022. Gold bar and coin investments shrank about 3% from the prior year, with Western hemisphere investors buying less and Eastern hemisphere investors buying more, amidst anecdotes of Chinese citizens looking to store more of their wealth in gold given their falling stock market and declining property values. Finally, we would note that ETF holdings of physical gold fell by 244 tonnes in 2023, the third year in a row of outflows and a trend that has continued into 2024, as January saw a reduction of 51 tonnes and represented the eighth consecutive month of outflow. Nonetheless, we remain constructive on the likely path and relative attractiveness of gold prices during 2024, potentially breaking through the $2,100/oz level again as central banks start cutting interest rates in the middle of this year.