In this month's issue:
A Booster Shot for Europe
Mark Luschini
Germany is the biggest economy in Europe and one of the top five largest in the world. Consequently, the state of its economy has a huge influence on the health of Europe overall. In summary, we believe that recent measures taken by German policymakers will fuel activity, allowing growth to accelerate and provide a positive impulse throughout the Euro area. This thesis reinforces our conviction that European equities can continue to build on their already impressive advance this year and deliver solid gains for U.S. investors going forward.
Officials in Berlin are embarking on an era of fiscal expansion. A stimulus equivalent to approximately 1% of GDP is primed to be released, helping to boost business and investor confidence despite unease about the tariffs applied to goods that Germany exports to the U.S. (a non-trivial 3.2% of GDP). The Expectations Index by the Ifo Institute, a measure of German business expectations that tends to correlate well with future economic conditions, posted a reading in August that was the highest since 2022. Additionally, the monthly investor sentiment poll reported by the ZEW (a.k.a. Centre for European Economic Research), while having pulled back in August, was at its highest level in more than three years as recently as July. From a monetary perspective, financial conditions are easing due to the series of rate cuts undertaken by the European Central Bank, as inflation has subsided to a level approaching its target of 2%. This has also helped narrow the spread between German corporate bonds and sovereign bonds (the Bund), which in turn reduces borrowing costs for companies.
Expectations and Interest Rates
Guy LeBas
Inflation in the United States has remained modestly above the Federal Reserve’s 2% benchmark, supported by recent price data that continues to challenge expectations of a disinflationary lull. According to the BEA, the core PCE—the Fed’s preferred gauge—stood at +2.9% year-over-year in July after two notable upticks, in part from the lingering pass-through of elevated tariffs. It remains unclear whether these price increases are one-time or ongoing in nature. Our base case is that tariffs will act more like a tax than a source of inflation, but the way we measure short-term data conflates the two.
Understanding inflation dynamics is essential for both economic stability and achieving optimal financial returns. On the demand side, inflation encourages timely consumption, while expectations of deflation have the opposite effect. On the supply side, inflation eases “wage rigidity” by allowing firms to maintain or freeze nominal wages—so real wages fall—without resorting to cultural job cuts.
The Ides of September
Gregory M. Drahuschak
Numerous measures of historic market activity underscore that September is typically the worst month for stocks, as the S&P 500 has ended the month higher on average only 25% of the time. In the most recent 10 and 20 years, the S&P 500 posted an average loss for the month of 1.26%.
While September results have been less than stellar, they have not deterred the market from heading generally higher.
The reasoning behind September often producing a negative result is questionable. The end of summer vacation, expectations of a negative September result, end-of-the quarter portfolio adjustments, and funds taking whatever losses they have before their fiscal year ends are all cited as reasons for September to be the worst month of many years.
You can read the full Investment Perspectives here.
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