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Deutsche Bank has seven themes it said are keeping it “awake at night” although growing optimism for a soft landing for the U.S. economy has helped keep stocks move higher in recent months.
The S&P 500 (SP500) (VOO) (IVV) may settle in the red for April but Deutsche Bank in a research note said the market is still in an optimistic mood as the benchmark has notched back-to-back quarterly gains above 10% for the first time in over a decade. As well as U.S. growth expectations rising in 2024, investors foresee the Federal Reserve moving interest rates lower rather than higher.
Still, Deutsche Bank has a list of concerns. “(Given) the repeated surprises of the last 4 years, it’s worth keeping these on your radar over the months ahead,” Jim Reid, head of global economics at Deutsche Bank, said. Here’s an outline of its list:
Pandemic stimulus effects
The world’s largest economy is still benefiting from “excess” stimulus such as savings but that overhang is likely to go away by the end of 2024, raising the question: Is the lag of monetary policy just delayed?
Inflation still above target
Core CPI excluding shelter is rising, now standing at an annualized 3.3% over the last 3 months. Sticky inflation means rates could stay in restrictive territory for longer, “thus raising the chance of a market accident,” Reid said.
Leading indicators pointing in a negative direction
Among data points, small businesses have struggled in the U.S. growth cycle. Also, the U.S. Senior Loan Officers Survey leads gross domestic product by a couple of quarters and while there’s recently been an improvement from both “there’s still a sizeable gap by historic standards,” Deutsche Bank said.
Is the economy as strong as it seems?
DB said despite the gains in nonfarm payrolls, employment measured in the household survey has been flat for six months.
Several metrics suggest current valuations are stretched
Among them, U.S. equities have logged an “astonishing performance” relative to the rest of the world but much of it depends on the so-called Magnificent 7 group of stocks: Alphabet (GOOG) (GOOGL), Amazon (AMZN), Apple (AAPL), Meta Platforms (META), Microsoft (MSFT), Nvidia (NVDA), and Tesla (TSLA).
Government debt levels remain very high
In several cases, debt levels are still rising. The U.S. national debt is forecast to exceed its all-time high after WWII during the next president’s four-year term, the firm said.
Geopolitical tensions remain tense
US-China tensions have not abated. Gold prices have surged in recent months partially on haven demand. Meanwhile, the situation in the Middle East including attacks on commercial ships in the Red Sea have driven a run-up in freight costs over December and January.
