A Compelling Opportunity in REITs

Economic

Summary:

Given the Fed is expected to start cutting interest rates in 2H24, we believe now is an excellent time to consider an allocation to REITs.

A retrospective of REIT returns tells an interesting story. In Display 1,a 20-year lookback shows U.S. REITs1 have underperformed the broader U.S. equity market by about 2.4%. However, a closer look shows that over the first 15 years of this 20-year period (6/30/2004-6/30/2019), REITs outperformed the broader U.S. equity market by about 0.7%. But over the past 5 years the REIT story changes dramatically. In an economic environment impacted by the COVID-19 outbreak and Quantitative Tightening (QT) by the Fed, REITs have underperformed significantly, generating total returns of only 3.40% on an annual basis, compared to 15.05% for U.S. equities.

Interestingly, this outperformance of broad U.S. equities versus REITs has resulted in a significant valuation discrepancy. Over the past 20 years, U.S. REITs have traded at a +0.5x premium to U.S. equities on a multiple basis, but today U.S. REITs are trading at a -4.3x multiple discount. Bringing this relationship back to par would imply between 30-40% of relative outperformance of REITs compared to equities.

The Magnificent 7 have propelled U.S. equities more recently and one might assume this vast valuation discount for REITs is primarily attributable to the market dominance of this group. However, further analysis negates this contention; the multiple discount is evident across almost all Global Industry Classification Standard (GICS) sectors within the broader U.S. equities market, with the exception of energy and utilities (Display 2). The bottom line? REITs are cheap versus the overall S&P 500, the vast majority of GICS sectors within the S&P 500 and the Magnificent 7 based on a 10-year z-score. A Compelling Opportunity in REITs_2

The obvious question is whether REITs are in fact “broken” or is this a rare opportunity to deploy capital in a sector on the precipice of a compelling change. Spoiler alert: we think there will be significant opportunity based on compelling change. And what is that change, one might ask? Well, we believe there will be a REITs breakout when QT morphs into Quantitative Easing. The reason is that history tells us REIT total returns have a strong negative correlation to interest rates, a relationship that certainly persists today (Display 3). A Compelling Opportunity in REITs_3

Central banks across the globe have begun a rate cutting cycle, and the Fed is widely anticipated to follow suit, with two cuts anticipated in 2H24. In fact, the market implied policy rate one year from now stands at roughly 4%, appreciably lower than today’s target range of 5.25% - 5.50%.

Market returns after the first rate cut can vary widely depending upon sector. However, as seen in Display 4, the average performance of REITs stacks up well versus other sectors one year after the first rate cut. A Compelling Opportunity in REITs_4

Active management within the REIT space has historically produced what we believe are compelling returns for investors – and today is no different. Not all real estate is created equal, nor are all companies created equal. Since 2007, the annual spread between the best and worst performing U.S. REIT sub sectors has ranged from 30% to 76%. On a YTD basis through 2Q24, REIT returns for the best and worst performing sub sectors varied by over 35%. On the basis of individual stocks, the variation of return was upwards of 80%.

The bottom-up, fundamental research and investment process we adhere to at Morgan Stanley Investment Management allows us to identify those sectors and stocks that we believe have the ability to outperform – and capture excess returns through alpha generation, in addition to the beta of this recovery. We use internal proprietary research to invest in publicly traded real estate securities that we believe offer the best value relative to their underlying assets and earnings. Our investment approach is based on 3 core principles:

1. Relative value support

2. Downside risk mitigation through an integration of risk factors

3. High-conviction positioning with an identifiable investment thesis and positive trajectory on critical factors for the company

These principles, as well as an evaluation of trends unfolding within the real estate sector, facilitate our portfolio positioning.

In summary, REITs have significantly underperformed the broader U.S. equity market over the past five years, primarily due to the impact of COVID-19 and the rise in interest rates. As a result, REITs are trading at attractive valuations. Furthermore, REIT total returns historically have a strong negative correlation to interest rates and typically do particularly well in stabilizing and declining interest rate environments. Given that the Fed is expected to cut interest rates in 2H24, we believe today is a great time to consider an allocation to REITs.

To stay updated on all economic events of today, please check out our Economic calendar

Risk Warnings and Disclaimers

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Cohen

Economic

Crude palm oil (CPO) prices are anticipated to hover around RM4,000 per tonne by year end, according to the Malaysian Palm Oil Board (MPOB).

MPOB director general Datuk Ahmad Parveez Ghulam Kadir stated that CPO prices ranged between RM3,800 and RM4,200 per tonne last year.

“We have observed a rise in stock levels this year, but we are hopeful that by year end, our stocks will stay below two million tonnes,” he told Bernama on the sidelines of the third Sustainable Vegetable Oils Conference organised by the Council of Palm Oil Producing Countries (CPOPC).

According to the board, Malaysia’s CPO production increased by 2.9% to 1.89 million tonnes in August 2024 from 1.84 million tonnes in the preceding month, while CPO stocks rose by 2.5% to 953,145 tonnes against 930,099 tonnes in July.

It added that palm oil exports fell 9.7% to 1.53 million tonnes from 1.69 million tonnes in July.

Earlier, Ahmad Parveez delivered a presentation in which he emphasised that MPOB is actively working to meet the criteria and traceability requirements of the European Union Deforestation-free Regulation (EUDR).

He explained that MPOB is conducting canopy mapping to document the areas where oil palm is cultivated.

“We need to be prepared, which is why we are undertaking this effort. Using satellite imagery, we can identify all oil palm plantations.

“We can distinguish between oil palm, coconut, or other crops based on the planting methods. Additionally, by analysing the spacing, we can estimate the age of the trees,” he said.

Source: Theedgemarkets

To stay updated on all economic events of today, please check out our Economic calendar

Risk Warnings and Disclaimers

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Warren Takunda

Stocks

September S&P 500 E-Mini futures are up +0.09%, and September Nasdaq 100 E-Mini futures are down -0.01% this morning as market participants braced for the Federal Reserve to lower interest rates, with opinion divided on the size of this week’s cut.

Investors were also evaluating the implications of a second assassination attempt on former President Donald Trump. Trump is safe after his Secret Service detail opened fire on a man brandishing an assault rifle at his West Palm Beach, Florida, golf course on Sunday, in what the Federal Bureau of Investigation described as an apparent assassination attempt.

In Friday’s trading session, Wall Street’s main stock indexes closed higher, with the benchmark S&P 500, blue-chip Dow, and tech-heavy Nasdaq 100 notching 2-week highs. Uber Technologies climbed over +6% after the ride-share provider said it would expand its partnership with Alphabet’s Waymo to bring autonomous ride-hailing to Austin and Atlanta next year. Also, Arm advanced more than +5% after Raymond James initiated coverage of the stock with an Outperform rating and a price target of $160. In addition, RH surged over +25% after the company reported stronger-than-expected Q2 results. On the bearish side, Adobe slid more than -8% and was the top percentage loser on the S&P 500 and Nasdaq 100 after the company provided below-consensus Q4 revenue guidance. Also, Boeing fell over -3% and was the top percentage loser on the Dow after its largest labor union went on strike, and Moody’s Ratings placed the company’s debt rating on review for a potential downgrade to junk.

Economic data released on Friday showed that the University of Michigan’s U.S. consumer sentiment index rose to a 4-month high of 69.0 in September, stronger than expectations of 68.3. Also, the University of Michigan’s September year-ahead inflation expectations ticked down for the fourth consecutive month to 2.7% from 2.8% in August, better than expectations of no change at 2.8%. In addition, the U.S. import price index fell -0.3% m/m in August, better than expectations of -0.2% m/m.

The U.S. Federal Reserve’s interest rate decision and Fed Chair Jerome Powell’s post-policy meeting press conference will take center stage in the coming week. The Federal Open Market Committee is widely expected to lower interest rates for the first time in four years on Wednesday, with anxious investors discussing whether officials will consider a quarter-point cut sufficient for an economy showing signs of slowing, or whether they will decide on a half-point reduction instead. Investor attention will also be on the central bank’s quarterly “dot plot” in its Summary of Economic Projections, which shows FOMC member forecasts regarding the path of interest rates.

Meanwhile, U.S. rate futures have priced in a 41.0% chance of a 25 basis point rate cut and a 59.0% chance of a 50 basis point rate cut at the upcoming monetary policy meeting.

“If pricing stays where it is currently, it would be the first meeting in years where there’s serious uncertainty about the rates decision,” Deutsche Bank analysts said in a note.

Market participants will also be monitoring a spate of economic data releases this week, including U.S. Retail Sales, Core Retail Sales, Industrial Production, Manufacturing Production, Business Inventories, Building Permits (preliminary), Housing Starts, Crude Oil Inventories, Initial Jobless Claims, Current Account, Philadelphia Fed Manufacturing Index, Existing Home Sales, and Leading Index.

On the earnings front, notable companies like FedEx, General Mills, Darden Restaurants, and Lennar are set to report their quarterly figures this week.

Today, investors will likely focus on the U.S. NY Empire State manufacturing index, set to be released in a couple of hours. Economists, on average, forecast that the September NY Empire State manufacturing index will stand at -4.10, compared to last month’s value of -4.70.

In the bond market, the yield on the benchmark 10-year U.S. Treasury note is at 3.644%, down -0.08%.

The Euro Stoxx 50 futures are up +0.10% this morning, recovering from early losses, while investors cautiously awaited monetary policy decisions from major central banks later this week. Retail stocks gained ground on Monday. Final data from the statistical office Istat released on Monday showed that Italy’s annual inflation rate eased to 1.1% in August from 1.3% in July, confirming preliminary estimates. Meanwhile, market participants are bracing for policy decisions from the Fed, the Bank of England, and the Bank of Japan, in addition to key economic data from the region this week. The BoE is scheduled to announce its interest rate decision on Thursday, with investors currently divided on whether it will opt for a rate cut for the second time in two months. Comments from European Central Bank officials will also capture investor attention this week, with several governors set to speak and President Christine Lagarde slated to deliver a speech in Washington on Friday. Speaking over the weekend, hawkish policymakers Joachim Nagel and Pierre Wunsch cautioned that the ECB must remain vigilant on inflation, though Wunsch acknowledged that further rate cuts are probable if the central bank’s base scenario materializes. In corporate news, Volkswagen Ag dropped over -1% after Jefferies stated in a note that the German automaker might book billions of euros in provisions for planned capacity reductions as soon as the fourth quarter.

Italy’s CPI and Eurozone’s Trade Balance data were released today.

The Italian August CPI has been reported at +0.2% m/m and +1.1% y/y, in line with expectations.

Eurozone July Trade Balance was at 21.2B euros, stronger than expectations of 14.9B euros.

Markets in Japan and mainland China were closed for the holidays.

China’s Shanghai Composite Index was closed today for the Mid-Autumn Festival. Mainland China’s financial markets will reopen on Wednesday.

Japan’s Nikkei 225 Stock Index was closed today for the Respect for the Aged Day holiday. The markets will reopen on Tuesday.

Pre-Market U.S. Stock Movers

Intel gained over +3% in pre-market trading after Bloomberg News reported that the chipmaker had officially qualified for up to $3.5 billion in federal grants to make semiconductors for the Pentagon.

Entegris rose more than +2% in pre-market trading after Citi upgraded the stock to Buy from Neutral with a price target of $130.

Colgate-Palmolive fell over -1% in pre-market trading after Wells Fargo downgraded the stock to Underweight from Equal Weight with an unchanged price target of $100.

Source: BarChart

Risk Warnings and Disclaimers

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ING

Economic

Energy

Under a second term for Trump – even without Republican control of Congress – the speed of decarbonisation in the US will slow down due to weakened energy and environmental regulation, clean energy funding support, and international climate leadership. Nevertheless, the IRA is likely to survive given the economic benefits it can create. Still, without a comprehensive climate policy ecosystem, the US green agenda may become obscured.

Oil and gas

We could witness reinforced US energy dominance through increased oil and gas production and exports. This includes promoting LNG production, contrary to Biden’s moratorium on licensing new LNG exports, which was recently halted by a federal judge. It also involves cancelling methane regulations and streamlining the authorisation process for new oil and gas exploration and infrastructure projects.

IRA

The IRA is unlikely to be completely repealed. Only Congress can vote to repeal the IRA – or indeed any legislation – and this would be hard to achieve under a split or Democrat-controlled Congress. Plus, Republican states have been huge beneficiaries of the IRA, with about 80% of announced investment in clean energy flowing into Republication congressional districts and creating green jobs.

The legislation has also gained popularity among corporations and investors, and they would be reluctant to see the financial incentives go. Think about Obamacare: Trump was keen to strike it down as president, but Congress was not able to repeal it as the law gradually became more popular thanks to the public buy-in of its benefits.

However, the implementation of the IRA will become harder. The qualifying rules for certain tax credits could become stricter, especially around using domestically produced content for clean energy manufacturing. There would be little focus on equipping government staff with the know-how to review clean energy funding applications. As a result, we could see longer application timelines slowing down project development.

Moreover, while the IRA itself is likely to survive, as much as 30% of the energy and climate-related funding under the IRA is at various degrees of risk of being scaled back. Several tax credits, especially the consumer electric vehicle (EV) tax credits that have an initial spending estimate of $12bn, can be rolled back. The $100bn non-tax credit funding, including loans and loan guarantees from the Department of Energy’s (DOE’s) Loan Programs Office (LPO), as well as dedicated grants toward environmental justice, may also be lowered, if not stalled. The DOE has committed about $30bn of clean energy loans and loan guarantees to companies, but has only started lending around $6.5bn.

The tax credits that are likely to remain unchanged include those for carbon capture and storage (CCS), hydrogen, renewable power, nuclear, and manufacturing, among others (this will be further analysed in the following sections). It is worth noting, however, that since the tax credits under the IRA are non-capped, the actual spending can be a lot higher, potentially adding more pressure to fiscal sustainability and hence spending compromises.

Breakdown of initial energy and climate related spending estimates under the IRA

Source: ING Research, Joint Committee on Taxation, Senate Democrats

EVs

The EV industry has been a punching bag of Trump’s campaign, with his team declaring on the Republican policy platform to reverse Biden’s EV policy and scrap the nationwide EV production and sales targets.

As such, EV tax credits are highly likely to be scaled back. Plus, these tax credits are consumer-based, not manufacturer-based, and may be repealed more easily with softer business pushback. This can be done through tightening tax credit eligibility guidelines. It can also be done by putting a cap on the number of EVs allowed to receive EV tax credits.

Moreover, the funding for developing the National Electric Vehicle Infrastructure (NEVI) programme under the Infrastructure Investment and Jobs Act (IIJA) will likely be lowered because of the unpopularity of EVs among Republicans and the slow speed of funding being distributed to projects.

Lastly, the Environmental Protection Agency‘s (EPA’s) strictest-ever proposed rule on vehicle emissions standards, aimed at boosting EV demand, is also likely to be reversed, even though car manufacturers may have already made investment decisions to reduce tailpipe emissions.

Car manufacturers remain committed to electrifying their fleet, despite some recent delay in EV production targets. However, a lack of direct EV support, especially from the infrastructure side, would mean a slower deployment rate overall.

Renewable power

The centrepiece policies that have led to massive development in renewable technologies and project finance are the renewable power Production Tax Credits (PTCs) and Investment Tax Credits (ITCs). Enacted in 1992 and 2005, respectively, the PTCs and ITCs have been extended under the IRA until 2032, but starting in 2025, these credits will become "technology-neutral" as long as a project can demonstrate it has zero or negative emissions.

This means that a wider range of technologies – including solar, wind, hydropower, geothermal, marine, nuclear, and waste energy recovery – will become eligible. Notably, combustion and gasification (C&G) facilities can also potentially qualify for the credits. The technology-neutral tax credits are set to start phasing out after 2032, or when emissions from the US power sector have dropped to below 25% of 2022’s emissions level, whichever comes later.

The technology-neutral tax credits will likely survive if Trump wins but Republicans fail to control Congress. This is because even under the first Trump administration, the technology-specific ITCs and PTCs were not repealed and solar and wind continued to develop steadily. Furthermore, the expansion of eligibility under the technology-neutral tax credits can benefit non-renewable zero-emission projects, a provision that may be welcomed by Republicans.

These positive spins do not mean that the industry will get sufficient support to accelerate clean power development. We would expect less effort to re-train government staff, build transmission lines, or reform the grid. There could also be more gas-fired power plants approved to support increasing electricity demand.

Hydrogen and CCS

Hydrogen (especially blue hydrogen) and carbon capture and storage (CCS) will gain continued support, as these technologies can provide business opportunities to oil and gas companies and heavier industries. Hydrogen and CCS hubs would continue to develop in this case, with permitting reforms potentially improving the regulatory conditions for CCS project development. A potential downside risk is that any cuts in the DOE’s Loan Program Office’s (LPO’s) loans or loan guarantees would affect the funding for these projects.

Critical minerals

For Trump, onshoring manufacturing and protecting key sectors would be a priority. This means enhanced protectionist efforts such as import tariffs in favour of batteries and critical minerals. Trump is now proposing to impose a 10% tariff on all goods and a 60% tariff on all Chinese goods.

Less competition in the US could strengthen domestic clean energy supply chains, but questions remain as to how fast they can be built up. China’s absolute dominance in critical minerals means that the US may face sourcing challenges and need to accelerate partnerships with other suppliers. Thus, the US could in the short to medium term bear higher costs in the energy transition.

Regulation

There would be substantial rollbacks of punitive regulations that limit dirty economic activities. For instance, there could be cancellations on Biden’s effort to charge a fee on methane emissions from the oil and gas industry. The EPA’s rule on vehicle emissions standards is also likely to be reversed.

The EPA’s newly finalised regulation to reduce emissions from coal and gas-fired power plants in the 2030s unless they can demonstrate deep emissions reduction is also at a high risk of being overturned.

Climate leadership

Regardless of which party controls Congress under a second Trump administration, we would see the US retreat from international climate leadership. This features a second withdrawal from the Paris Agreement, withdrawal from potential commitments such as a recent one (under discussion) to the UN Treaty to End Plastic Pollution, stalled or even cancelled efforts to mandate climate data disclosure, and less clean energy technology innovation, among others.

To stay updated on all economic events of today, please check out our Economic calendar

Risk Warnings and Disclaimers

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Warren Takunda

Economic

American consumers and home buyers, business people and political leaders have been waiting for months for what the Federal Reserve is poised to announce this week: That it’s cutting its key interest rate from a two-decade peak.

It’s likely to be just the first in a series of rate cuts that should make borrowing more affordable now that the Fed has deemed high inflation to be all but defeated.

Consider Kelly Mardis, who owns Marcel Painting in Tempe, Arizona. About a quarter of Mardis’ business comes from real estate agents who are prepping homes for sale or from new home buyers. Customer queries, he recalls, quickly dropped almost as soon as the Fed started jacking up interest rates in March 2022 — and then kept raising rates through July 2023.

As the housing market contracted, Mardis had to lay off about half his staff of 30. It was the worst dry spell he had experienced in 14 years.

After the Fed begins cutting rates on Wednesday, Mardis envisions brighter times ahead. Typically, a succession of Fed rate cuts leads over time to lower borrowing costs for things like mortgages, auto loans, credit cards and business loans.

“I’m 100% sure it would make a difference,” Mardis said. “I’m looking forward to it.”

At the same time, plenty of uncertainty still surrounds this week’s Fed meeting.

How much will the policymakers decide to reduce their benchmark rate, now at 5.3%? By a traditional quarter-point or by an unusually large half-point?

Will they keep loosening credit at their subsequent meetings in November and December and into 2025? Will lower borrowing costs take effect in time to bolster an economy that is still growing at a solid pace but is clearly showing cracks?

Chair Jerome Powell emphasized in a speech last month in Jackson Hole, Wyoming, that the Fed is prepared to cut rates to support the job market and achieve a notoriously difficult “soft landing.” That is when the central bank manages to curb inflation without tipping the economy into a steep recession and causing unemployment to surge.

It’s not entirely clear that the Fed can pull it off.

One hopeful sign is that as Powell and other Fed officials have signaled that rate cuts are coming, many interest rates have already fallen in anticipation. The average 30-year mortgage rate dropped to 6.2% last week — the lowest level in about 18 months and down from a peak of nearly 7.8%, according to the mortgage giant Freddie Mac. Other rates, like the yield on the five-year Treasury note, which influences auto loan rates, have also tumbled.

“That really does help lower those borrowing costs across the board,” said Kathy Bostjancic, chief economist at Nationwide Financial. “That helps to give nice relief to consumers.”

Businesses can now borrow at lower rates than they’ve been able to for the past year or so, potentially boosting their investment spending.

“The question is if it’s helping quickly enough ... to actually deliver the soft landing that everyone’s been hoping for,” said Gennadiy Goldberg, head of U.S. rates strategy at TD Securities.

Many economists would like to see the Fed announce a half-point rate cut this week, in part because they think the officials should have begun cutting rates at their previous meeting in July. Wall Street traders on Friday signaled their expectation that the Fed will carry out at least two half-point cuts by year’s end, according to futures prices.

Yet Goldberg suggested that there would be downsides to implementing a half-point rate cut this week. It might signal to the markets that the Fed’s policymakers are more worried about the economy than they actually are.

“Markets could assume that something is wrong and the Fed sees something quite terrible on the horizon,” Goldberg said.

It could also raise expectations for additional half-point cuts that the Fed might not deliver.

In the long run, more important than Wednesday’s Fed action is the pace of rate cuts through next year and the ultimate end point. If Fed officials conclude that inflation is essentially defeated and they no longer need to slow the economy, that would suggest that their key rate should be at a more “neutral” setting, which could be as low as 3%. That would require a series of further rate cuts.

Many economists think the economy needs much lower rates. Diane Swonk, chief economist at KPMG, notes that hiring has averaged just 116,000 a month for the past three months, a level equivalent to the sluggish job growth coming out of the 2008-2009 Great Recession. The unemployment rate has risen by nearly a full percentage point to 4.2%.

“There is a fragility out there when you are not hiring at a very strong pace,” Swonk said. “This is still a much weaker labor market then we thought we had.”

Still, Fed rate cuts may provide a crucial boost to the economy just when it’s needed.

Michele Raneri, head of U.S. research at TransUnion, a credit monitoring company, noted that lower rates typically lead consumers to refinance high interest-rate debt — principally credit card borrowing — into lower-cost personal loans. Doing so would ease their financial burdens.

And once mortgage rates fall below 6%, Raneri said, more homeowners will likely be willing to sell, rather than holding on to their house out of reluctance to swap a low mortgage rate for a much higher one. More home sales would help relieve the supply crunch that’s made it hard for younger people to buy a first home.

“That starts to break up this logjam that we’ve been in where there’s a low inventory of houses,” Raneri said. “We need some people to start moving to start that churn.”

Other small businesses are seeing signs that the churn is picking up. Brittany Hart, who owns a software consulting firm in Phoenix that works with mortgage brokers, wealth managers and banks, is noticing more interest from potential clients in adopting new software to boost efficiency. That is because they expect the housing market to pick up.

Hart has started looking for three new employees to help handle the expected business, to add to the roughly 20 employees she has now.

“This is the first leading indicator that we are getting back to that normal activity in the housing market,” she said.

Source: AP

To stay updated on all economic events of today, please check out our Economic calendar

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Citibank

Economic

Portfolio considerations

Reflecting uncertainty, “defensive” industries such as utilities have a history of outperforming the S&P 500 by 2.2 percentage points on average in the six-months prior to US presidential elections since 1990, then underperforming by 1.4 percentage points in the six-months after. Current market trends are conforming to this pattern.

“High dividend yield” strategies have outperformed in the past two months, but this is partly a reflection of the sharp decline in large cap US Tech shares (The market cap weighted semiconductor index - comprised 60% of Nvidia – is off 22% since early July). We would tend to favor high quality consistent dividend growers over the “highest yielders” after recent market moves. We also doubt that a single AI-tech play will dominate markets in 2025. Small cap stocks – measured by the Russell 2000 – have a history of strong outperformance only in the first year of a new economic recovery. They have to go through a recessionary contraction before this happens.

Since credit markets have been solid and there has been no “near death” moment for the Russell, we don’t see a particularly strong return outlook for lower quality SMID.

The Strategy for Uncertainty? Raise Quality_1

September is Historically Negative for the S&P 500

First, we would note that a skittish performance of markets about two months ahead of an uncertain US presidential election is entirely normal. Weak data and weak markets frequently go hand in hand in late summer. Since 1930, the only month that averages a negative return for the broad US market is September (though many positives and negative have been experienced in particular years). When one includes only US presidential election year uncertainty, the weakness extends to October.

We are cautious of depending on historic patterns without assessing wider factors. But to date, it is notable that the composition of market activity is also following historic, election year norms. Defensive industries such as utilities, healthcare, and staples have typically outperformed a downwardly biased equity market in the six-months before US elections. On average, they go on to underperform a rising US equity market in the six months after US elections are out of the way.

Allocate to Higher Quality to Deal with Uncertainty

But what is a standout that may potentially endure through a variety of uncertain scenarios? The discipline of managing a firm to pay a higher dividend over many years “screens out” most firms, leaving a high-quality bias. This is not always what produces the highest return over short periods. Over cycles, it tends to eliminate heavily indebted firms.

Heavily indebted cyclical firms that survived economic crashes historically produced large “bounce-backs” in the year following the start of new economic cycles. While we often wish we could tell investors a more exciting story, no economic crash appears at hand, and certainly none has already happened. Without a large drop first, a stronger burst of performance for low quality leveraged cyclicals is not at hand.

Dividend Growers have Consistently Outperformed

What are some wider factors one should consider to understand markets now? For one, tech shares posted one of the five strongest outperformance periods in the past 25 years through early July. With just three US tech mega-caps rising to nearly $10 trillion in aggregate value in 1H 2024, returns were “sucked” out of other industries. Until 2Q of this year, EPS gains were sparce for most sectors. AI promises beckoned until the momentum faded. But since July, equity investors have turned to the tangible returns of high dividend yielders such as utilities as interest rates fell.

With tech correcting lower “high current yield” shares reaching record high levels, we would emphasize the left-behind dividend growth shares that have lagged. Tech (offense) and utilities (defense) are necessary components of a diversified equity portfolio. But even together, the two sectors wouldn’t make for a complete portfolio.

Election and economic policy uncertainty is likely to remain high until early November at a minimum. This should not stop investors from assessing if their portfolios are positioned to best suit their needs. The days of a 5% cash yield are nearly over with the Fed set to cut policy rates on September 18. So are the days when a single stock drove nearly a third of US equity market returns as Nvidia did this spring. Intermediate duration bonds are still yielding more than the Fed’s own expected policy rate over the next few years and can still benefit from Fed rate cuts, if marginally. Most global equities – apart from US tech – trade near long-term historic valuations.

To stay updated on all economic events of today, please check out our Economic calendar

Risk Warnings and Disclaimers

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Warren Takunda

Cryptocurrency

Bitcoin starts a pivotal macroeconomic week with the battle for $60,000 support raging.

After slipping into the weekly close, BTC price action is acting in a key area of interest for bulls.

Price indicators reveal the extent of the need to reclaim $60,000 — a resistance/support flip here would improve the setup of both the daily and weekly charts.

This week sees the United States Federal Reserve in the driving seat as it decides on the size of what could be its first interest rate cut in over four years.

Markets are confident that the outcome will be just that — but last-minute uncertainty is pushing expectations that the Fed’s move will be more drastic than the bare minimum.

Bitcoin analysts are biding their time before drawing conclusions on how BTC/USD may react.

Bitcoin dominance is at three-and-a-half-year highs, and ETH/BTC spells out taxing times for altcoins.

BTC price weekly close brings bulls down to earth

Bitcoin came under pressure into the Sept. 15 weekly close, costing bulls both $60,000 and a chunk of the week’s recovery.

Data from Cointelegraph Markets Pro and TradingView shows BTC/USD circling the $59,000 mark at the time of writing, having still managed to gain 7.8% over the past week. Markets See 0.5% Fed Rate Cut — 5 Things to Know in Bitcoin This Week_1

Markets See 0.5% Fed Rate Cut — 5 Things to Know in Bitcoin This Week_1

BTC/USD 1-hour chart. Source: TradingView

“Its going to be a choppy week for Bitcoin,” popular trader and analyst Mark Cullen summarized in a post on X.

Cullen focused on the week’s main macroeconomic event in the form of the United States Federal Reserve’s interest rates decision due on Sept. 18.

“Red start to the week, and key interest rate decision announcement on Wednesday,” fellow trader Jelle continued.

“Hold the current area until then - and I think it looks great for further upside.” Markets See 0.5% Fed Rate Cut — 5 Things to Know in Bitcoin This Week_2

BTC/USDT chart. Source: Jelle/X

However, analyzing longer timeframes, Caleb Franzen, founder of Cubic Analytics, saw both the 365-day simple (SMA) and exponential (EMA) moving averages functioning as support.

“Since the initial breakout move in March & April 2023, BTC has been able to stay above its 1-year average and even flip it into support on several occasions, even during the recent pullback in August & September,” he noted in a blog post on Sept. 14.

“Could it be the case that Bitcoin is simply retesting its 1-year average before continuing higher, as it did in Q2 & Q3 2023? Until proven otherwise, yes!” Markets See 0.5% Fed Rate Cut — 5 Things to Know in Bitcoin This Week_3

Markets See 0.5% Fed Rate Cut — 5 Things to Know in Bitcoin This Week_3

BTC/USD 1-day chart with 365-period SMA, EMA (screenshot). Source: Cubic Analytics

Bitcoin indicators spell out resistance hurdles

BTC price indicators are facing a crucial resistance retest as Bitcoin bulls turn up the heat on $60,000.

As Cointelegraph reported, both the Ichimoku cloud and relative strength index (RSI) show key levels primed for being flipped back to support.

However, thanks to the lackluster weekly close on both daily and weekly timeframes, these continue to form a barrier to upside continuation.

On weekly timeframes, BTC/USD remains stuck below the Tenkan-sen and Kijun-sen trend lines on Ichimoku, while RSI is likewise pinned below the key 50 mark. Markets See 0.5% Fed Rate Cut — 5 Things to Know in Bitcoin This Week_4

Markets See 0.5% Fed Rate Cut — 5 Things to Know in Bitcoin This Week_4

BTC/USD 1-week chart with Ichimoku cloud, RSI data. Source: TradingView

The daily chart looks moderately better, with the price above 50 but still below the Ichimoku cloud. Markets See 0.5% Fed Rate Cut — 5 Things to Know in Bitcoin This Week_5

Markets See 0.5% Fed Rate Cut — 5 Things to Know in Bitcoin This Week_5

BTC/USD 1-day chart with Ichimoku cloud, RSI data. Source: TradingView

On 3-day timeframes, meanwhile, trading team Stockmoney Lizards is eyeing a bullish RSI divergence with price now ripe for playing out to bulls’ advantage.

“A lot is pointing towards a reversal within the last two weeks of September. Uptober is coming,” it summarized. Markets See 0.5% Fed Rate Cut — 5 Things to Know in Bitcoin This Week_6

Markets See 0.5% Fed Rate Cut — 5 Things to Know in Bitcoin This Week_6

BTC/USD 3-day chart with RSI data. Source: Stockmoney Lizards/X

Markets bet on Fed rate cut curveball

One event is set to shape macroeconomic volatility this week: the US Federal Reserve’s interest rate cut.

The first since March 2020, the move, which will only be confirmed at the Federal Open Market Committee (FOMC) meeting on Sept. 18, has nonetheless long been priced in by markets.

The only question is how large it will be; the debate currently centers on 0.25% and 0.5%, and the latest data from CME Group’s FedWatch Tool currently sees the latter as more likely. Markets See 0.5% Fed Rate Cut — 5 Things to Know in Bitcoin This Week_7

Markets See 0.5% Fed Rate Cut — 5 Things to Know in Bitcoin This Week_7

Fed target rate probabilities. Source: CME Group

For Bitcoin, the picture is complex — while risk assets should technically benefit from the added liquidity flowing into markets as a result of policy easing, observers are already drawing comparisons not to past good times, but crashes.

“While rate cuts may sound positive, it signals deeper concerns—like collapsing borrowing, spending, and investment,” financial analyst and investor Jacob King, CEO of crypto newsletter WhaleWire, told X followers at the weekend.

“Historically, sharp cuts have preceded recessions. Why? It shows the government is scared and scrambling to reverse an overreach.”

King specifically referenced the 2008 Global Financial Crisis as the elephant in the room.

“The warning signs today mirror those of 2008: rising unemployment, plummeting housing starts, falling home sales, and declining economic activity. Even the Fed funds rate chart looks eerily similar to 2007,” he concluded.

Others are eyeing Bitcoin’s close correlation to broader global liquidity conditions, these now on the rise, as grounds for optimism. Markets See 0.5% Fed Rate Cut — 5 Things to Know in Bitcoin This Week_8

Markets See 0.5% Fed Rate Cut — 5 Things to Know in Bitcoin This Week_8

Source: Quinten

Popular trader Rickus is meanwhile among those preparing for a bullish BTC price reaction. In part of his own X analysis, he stated:

“If you think rate cuts somehow will cause a selloff on BTC this week then you might have another thing coming, It wont cause panic if there's no panic in the stock market in the 1st place- IF rate cuts happen then generally the 1st cuts can be very bullish actually and has been known to coincide with price rises depending the back drop.”

Rickus argued that macro conditions are “vastly different” to 2008.

BTC price behavior shows “uncanny” patterns

Since its most recent cycle low in late 2022, BTC/USD has been copying history with “uncanny” precision.

That is according to popular analyst Checkmate, creator of onchain data resource Checkonchain.

Uploading a chart of Bitcoin Index activity to X, Checkmate revealed a striking pattern to BTC price action since the pit of the last bear market.

BTC/USD closely resembles its recovery from cycle lows of the past, providing key context to a year that has seen complaints of sluggish performance.

“Uncanny. Bitcoin is in the exact same spot as the last two cycles since the low,” he summarized.

“I prefer the cycle low comparison the most as it describes the psychological time it takes for investors to recover from a bear market. Upside measures are not relevant, but duration can be.” Markets See 0.5% Fed Rate Cut — 5 Things to Know in Bitcoin This Week_9

Markets See 0.5% Fed Rate Cut — 5 Things to Know in Bitcoin This Week_9

Bitcoin Index performance since cycle low. Source: Checkmate/X

Checkmate referenced another iteration of the Bitcoin price progress — that which measures activity between halving events.

By that token, onchain analytics firm Glassnode shows the current cycle is something of an underperformer. Markets See 0.5% Fed Rate Cut — 5 Things to Know in Bitcoin This Week_10

Markets See 0.5% Fed Rate Cut — 5 Things to Know in Bitcoin This Week_10

Bitcoin price performance since each halving. Source: Glassnode

Ether suffers as Bitcoin dominance taps 58%

Despite BTC price struggles, times are tough for Ether in the current Bitcoin bull market.

Data shows the extent of the largest altcoin’s comparative weakness as ETH/BTC sets new multi-year lows.

The pair is currently languishing at levels not seen since April 2021, setting new lows of 0.0387 on Sept. 16.

Reacting, Alex Thorn, head of research at Galaxy Research, noted that the pair had lost over 50% since Ethereum’s Merge two years ago. Markets See 0.5% Fed Rate Cut — 5 Things to Know in Bitcoin This Week_11

Markets See 0.5% Fed Rate Cut — 5 Things to Know in Bitcoin This Week_11

Source: Alex Thorn

In turn, Bitcoin’s share of the overall crypto market cap continues to rise.

New highs of 58.07% came on Sept. 16, marking the most “Bitcoin-heavy” crypto market in three-and-a-half years.

“I'm expecting Bitcoin dominance to be peaking out in this area,” crypto trader, analyst and entrepreneur Michaël van de Poppe predicted.

“All depending on $ETH, but it seems like we're close, given the current sentiment.” Markets See 0.5% Fed Rate Cut — 5 Things to Know in Bitcoin This Week_12

Bitcoin crypto market cap dominance 1-week chart. Source: TradingView

Van de Poppe nonetheless sees both altcoins as having “bottomed out” and Bitcoin itself due a fresh all-time high as soon as next month.

“Gold is making new ATHs, and Bitcoin is expecting to follow that path,” part of another X post reads, referencing recent gold performance.

“New ATH in October.” Markets See 0.5% Fed Rate Cut — 5 Things to Know in Bitcoin This Week_13

BTC/USDT 4-hour chart with RSI data. Source: Michaël van de Poppe/X

Source: Cointelegraph

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Markets See 0.5% Fed Rate Cut — 5 Things to Know in Bitcoin This Week

BTC price weekly close brings bulls down to earth

BTC/USD 1-hour chart. Source: TradingView

BTC/USDT chart. Source: Jelle/X

BTC/USD 1-day chart with 365-period SMA, EMA (screenshot). Source: Cubic Analytics

Bitcoin indicators spell out resistance hurdles

BTC/USD 1-week chart with Ichimoku cloud, RSI data. Source: TradingView

BTC/USD 1-day chart with Ichimoku cloud, RSI data. Source: TradingView

BTC/USD 3-day chart with RSI data. Source: Stockmoney Lizards/X

Markets bet on Fed rate cut curveball

Fed target rate probabilities. Source: CME Group

Source: Quinten

BTC price behavior shows “uncanny” patterns

Bitcoin Index performance since cycle low. Source: Checkmate/X

Bitcoin price performance since each halving. Source: Glassnode

Ether suffers as Bitcoin dominance taps 58%

Source: Alex Thorn

Bitcoin crypto market cap dominance 1-week chart. Source: TradingView

BTC/USDT 4-hour chart with RSI data. Source: Michaël van de Poppe/X

Source: Cointelegraph

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