Despite recent volatility, there are 5 reasons to be optimistic on markets, says Deutsche Bank

By Jamie Chisholm

Critical information for the U.S. trading day

The Dow Jones Industrial Average DJIA started the week by registering a fresh record high and the S&P 500 index SPX finished Monday just 0.6% shy of its own recent peak.

And yet, by dropping sharply last week, the latest American Association of Individual Investors sentiment survey showed just how many in the market are still prone to bouts of heightened angst. This is borne out by the S&P 500 just recording its worst weekly performance of the year and its best in consecutive weeks.

Fear not, says Henry Allen, macro strategist at Deutsche Bank, there are five reason to be optimistic on markets.

First, the Federal Reserve is about to embark on a monetary easing cycle, and when it does so into a soft economic landing that has "historically been a goldilocks combination," says Allen.

The chart below shows the S&P 500 when there were interest rate cutting cycles into a recession and ones where there was no recession. "It shows how the macro backdrop will be the biggest determinant for U.S. equities from here," says Allen.

Second, global economic data is continuing to point away from a recession. In the U.S., Allen notes, the nonfarm payrolls data continue to show steady growth "and there was always likely to be a normalization to a new steady state after the pandemic recovery." Furthermore, falling gasoline prices will provide support to consumers.

Also, the economic situation in Europe is not as dour as some think, with the composite purchasing managers' index for the euro region showing expansion for six months in a row.

Next, the prospect of Fed rate cuts has already eased financial conditions and many other central banks have begun lowering borrowing costs too, which overall should help support near-term economic growth. The 10-year Treasury's real yield has fallen below 1.60, the lowest in more than a year. U.S. mortgage rates have dropped to near 18-month lows, while credit spreads remain tight by the standard of the last decade, says Allen, indicating investors think that the Fed's high interest rates of late have not badly damaged corporate balance sheets.

Fourth, risk assets have proved impressively resilient to various shocks this year. Allen observes that since the S&P 500 began its latest rally in October 2023 it has quickly bounced back from any pullbacks and bursts of volatility, such as those caused by geopolitical tensions and the early August growth and carry-trade scare.

"The fact that markets have been so robust, even in moments of severe difficulty, suggests that the underlying macro story is still a very positive one, particularly as this year has seen inflation continue to fall with no obvious sign of a recession," says Allen.

Finally, as the seasonally soft September continues the market can start eyeing the fourth quarter, which has historically been one of the strongest periods for stocks. Indeed, the last three months of the year has provided a better return for the S&P 500 than any other quarter in the 21st century, losing ground in just one of the last eleven Q4s.

"As our colleagues in equity strategy have noted, this strength towards yearend is particularly the case around close U.S. presidential elections, which is the situation this year. The common pattern historically in close elections is a pullback in October, before a rally into year-end," Allen concludes.

Markets

U.S. stock-indices SPX DJIA COMP are higher at the opening bell as benchmark Treasury yields BX:TMUBMUSD10Y are little changed. The dollar index DXY has pared early losses, while oil prices (CL.1) dip and gold (BTCUSD) is trading around $2,577 an ounce.

   Key asset performance                                                Last       5d     1m      YTD     1y 
   S&P 500                                                              5633.09    2.96%  0.44%   18.10%  26.49% 
   Nasdaq Composite                                                     17,592.13  4.19%  -1.59%  17.19%  28.31% 
   10-year Treasury                                                     3.615      -3.50  -19.50  -26.59  -74.87 
   Gold                                                                 2602.5     2.64%  2.36%   25.62%  33.11% 
   Oil                                                                  70.17      1.99%  -4.93%  -1.63%  -22.88% 
   Data: MarketWatch. Treasury yields change expressed in basis points 

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The buzz

U.S. retail sales for August rose 0.1% month-on-month, better than estimates of a 0.2% decline. U.S. industrial production for August increased 0.8% month-on-month, above expectations for a 0.2% gain.

Intel shares (INTC) are up nearly 4% in premarket action after the semiconductor maker said it will turn its foundry business into an independent subsidiary, and it's deepening its work with Amazon Web Service on chip designs.

Microsoft (MSFT) said late Monday it would hike its dividend and launch a new $60 billion share buyback program.

Ferguson Enterprises (FERG) shares reversed early premarket losses despite the maker of plumbing, HVAC and appliance products missed quarterly revenue expectations, citing "muted" residential end markets as housing activity weakened.

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The chart

Here's some chartist catnip for those of a technical bent. From Bank of America's Stephen Suttmeier comes this image of the S&P 500 as it looks to create what's known as a cup and handle. That's considered bullish.

The S&P 500's move back above its rising 50-day moving average near 5512 has solidified 5500 to 5400 as tactical support, "boosting the potential for a bullish cup and handle from mid-July," says Suttmeier. "A decisive break above the August and July highs at 5650-5670 would confirm the cup and handle and favor more upside to 5930 and 6180," he adds.

Top tickers

Here were the most active stock-market tickers on MarketWatch as of 6 a.m. Eastern.

   Ticker  Security name 
   NVDA    Nvidia 
   TSLA    Tesla 
   GME     GameStop 
   INTC    Intel 
   PLTR    Palantir 
   AAPL    Apple 
   MSFT    Microsoft 
   DJT     Trump Media & Technology 
   NIO     Nio 
   HOLO    MicroCloud Hologram 

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-Jamie Chisholm

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09-17-24 0930ET

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