Monthly Market Monitor
October 2024
The US Federal Reserve surprised the majority of market observers in September by implementing a bigger-than-expected 50-basis-point interestrate cut.
The Fed covers its back
In a Nutshell
Our view on the markets
The US Federal Reserve surprised the majority of market observers in September by implementing a bigger-than-expected 50-basis-point interest-rate cut. However, the large rate cut is less a sign of panic in the face of a dimming employment market and more a deliberate effort to keep from getting behind the proverbial curve. The global rate-cutting cycle is in full swing now that the Fed has also made a move. Over 60% of all central banks around the world have eased their monetary policies lately. China, meanwhile, is also easing. In light of the mounting risk of missing the 5% growth target, Chinese authorities sprang a surprise in September by enacting a large stimulus package.
All-time highs in September
The typical autumn slump on equity markets lasted only for a short time in September. After a few down days at the start of the month, the S&P 500 index swung back upward to new all-time highs. The S&P 500 index has hit new record highs in September exactly 22 times since 1950. In such instances, US stocks consistently continued to climb higher in the fourth quarter (by an average of 5%) except in 1967 and 2018. Sentiment also is not
standing in the way of a year-end rally. The rate cut by the Fed was taken note of with some disenchantment on bond markets despite its surprisingly large size. A large part of the upcoming monetary-policy easing by central banks had already been priced into long-term bonds in both the USA and Europe.
On money and happiness
More money = greater happiness? Everyone ultimately has to decide for him- or herself whether this equation adds up. However, the latest findings from the field of happiness research indicate that a fundamental correlation between money and happiness really does exist up to very high income and wealth levels. A happiness plateau, in contrast, is verifiable only among a small percentage of people. But that isn’t necessarily bad news. On the contrary, knowledge about the correlation between wealth and happiness may motivate people to concern themselves more (or with greater pleasure) with investing their money in the future.
After a record-long period of more than two years, the US yield curve returned to normal in September. Since then, long-term bonds have resumed outyielding shortterm debt securities. Over the past several decades, an inversion of the yield curve was consistently an early warning sign of an impending recession. However, a disinversion, like the one that just happened recently, was actually the more important timing signal. But it remains to be seen whether this notorious recession indicator will deliver a reliable signal again this time. More than a few indicators that were dependable in the past have malfunctioned in the current cycle. The US economy thus far is still on the narrow glide path to a soft landing. The picture, meanwhile, looks different in Germany, where economic research institutes are projecting negative growth for 2024 for the second straight year. The German yield curve, which likewise recently disinverted, is signaling not just a slump in economic growth, but also implies further rate-cutting by the European Central Bank.
Chart of the Month
The Fed covers its back
Macro Radar
Taking the pulse of economic activity
The US Federal Reserve surprised the majority of market observers in September by implementing a bigger-than-expected 50-basis-point interest-rate cut. According to comments from Fed Chairman Jerome Powell, the large rate cut is not a sign of panic in the face of a dimming employment market, but instead was a deliberate move to keep from getting behind the proverbial curve. The chances of a successful soft landing are, in fact, still good – only a small minority continues to expect to see a recession within the next 12 months. The Fed’s projections foresee additional rate-cutting by year-end (50 bp) and in 2025 (100 bp) and would support a positive economic growth scenario, but there is no prospect of a return to the ultralow interest rates of the last decade. Fed officials lately have continually raised their estimate of the long-term equilibrium rate of interest, which stood at 2.9% at last look.
The SNB delivers
The global rate-cutting cycle is in full swing now that the Fed has also made a move. Over 60% of all central banks around the world have eased their monetary policies lately. The Bank of Japan ranks among the exceptions, as does the Reserve Bank of Australia, which left its policy interest rate at a 12-year high in September in view of stubborn inflation. Three quarter-point rate cuts have been delivered in the meantime by both the Riksbank in Sweden and the Bank of Canada, which are already in the home stretch toward the 2% target in their fight against inflation. Taming inflation has long since ceased to pose a challenge for the Swiss National Bank. Surprisingly rapid disinflation and the strong Swiss franc prompted the SNB to lower its policy rate again in September to now 1%. Export-oriented businesses in Switzerland are at best likely to breathe only a mild sigh of relief, though, and will probably be hoping for a further easing of interest rates in the quarters ahead.
Mounting pressure on the ECB
The Eurozone purchasing managers’ indices published in late September presented yet another disappointment. The Olympics effect in France fizzled out quickly, as was to be expected. France’s services sector PMI fell from 55 to 48.3 points. Even worse news came from Germany, where the manufacturing PMI retreated to 40.3 points (from 42.4 a month earlier). The market’s
priced-in probability of a policy rate cut by the European Central Bank in October rose to over 50% in reaction to the growing risk of a recession in Europe’s largest national economy. The obstacles to an acceleration in the pace of rate-cutting by the ECB appear high, but another interest-rate cut nonetheless looks set to happen by the time of the December monetary policy meeting at the latest.
China stimulates (once again)
After a series of mostly disappointing macroeconomic data in recent months and in light of the mounting risk of missing the 5% growth target this year, Chinese authorities sprang a surprise in September by enacting a large stimulus package. The People’s Bank of China lowered minimum reserve ratios for banks to boost their lending and cut a number of key policy interest rates. With regard to China’s housing market, Chinese officials held out the prospect of lower mortgage costs as well as an easing of conditions for purchases of second homes. Finally, Beijing reportedly also intends to strengthen the capital base of the country’s six largest banks. The government evidently has recognized that actions need to be taken to counter the downward pressure on economic activity and to address social tensions in China. However, the new stimulus package is unlikely to suffice to genuinely turn around the country’s economic growth prospects.
Downward | The rate-cutting cycle is gaining speed Policy interest rates
The global rate-cutting cycle is in full swing now that the Fed has also made a move.
Sources: Bloomberg, Kaiser Partner Privatbank
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Equities: All-time highs in September
• The typical autumn slump on equity markets lasted only for a short time in September. After a few down days at the start of the month, the S&P 500 index swung back upward to new all-time highs. At a level above 5,800 points, the blue-chip index at the end of September was already around 20% above analysts’ end-2024 price targets set last year. The S&P 500 index has hit a new all-time high in September exactly 22 times since 1950. In such instances, US stocks consistently continued to climb higher in the fourth quarter (by an average of 5%) except in 1967 and 2018. Widening market breadth buttresses the expectation of a positive final quarter in 2024. The number of new highs notched by stocks on the NYSE and the NASDAQ has increased significantly lately.
• Sentiment also is not standing in the way of a year-end rally. Risk appetite among fund managers fell to its lowest level of the year in September, according to Bank of America. During the more turbulent weeks of summer, fund managers substantially reduced their positions in technology stocks and raised their exposure to defensive sectors like utilities. Meanwhile, speculators have almost completely unwound their short positions on the VIX. A further rise in stock prices would probably surprise many market participants, not least in view of the upcoming elections. In the meantime, there is little about the stock-market trend going forward that Asset Allocation Monitor
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estate
can be inferred from the US Federal Reserve’s initial interest-rate cut – it depends for the most part on the trend in economic activity. The statistics on the last six rate-cutting cycles are unambiguous: when there was no recession, the performance of the S&P 500 averaged out to +22% over the subsequent 12 months, but when a recession did occur, the US blue-chip index rose only 2%.
• Chinese stocks got a massive boost in September from the latest economic stimulus package, which earmarks USD 110 billion in a first round to bolster China’s equity market. A swap facility to be set up will give brokers, investment funds, and insurance companies access to liquidity for investing in stocks, and businesses will be granted low-cost credit to fund share buybacks. These programs might be expanded even further in the future, according to comments from the governor of China’s central bank. The government of China continues the view the stock market as a tool for jacking up sentiment.
The typical autumn slump on equity markets lasted only for a short time in September.
The price of gold has resumed rallying in recent weeks with increased vigor.
Speculative investors were ill-prepared for the renewed interventions and held near-record-high short positions in late September. The recent explosive rally caught them on the wrong foot and left a higher high on the charts of Chinese stock indices like the Hang Seng China Enterprise Index. That could pave the way for a more sustainable upturn.
Fixed income: A lot is already priced in
• The rate cut by the Fed was taken note of with some disenchantment on bond markets despite its surprisingly large size. In fact, the days thereafter saw mild price declines because the yield on 10-year US Treasurys edged upward since mid-September as a result. A large part of the upcoming monetary-policy easing by central banks had already been priced into long-term bonds in both the USA and Europe in recent months. In contrast to previous rate-cutting cycles, the future upside potential appears constrained this time, particularly for US Treasurys, at least in the event that there is no recession and the desired soft landing occurs. A soft landing still seems possible judging by the latest macroeconomic data. Although a deterioration of the US employment market is clearly visible, a tipping point that ineluctably leads to a recession hasn’t been reached yet. Investors who would like to increase their exposure to government bonds to hedge against an adverse economic activity scenario should wait for US Treasurys to rise to yield levels with a “4” in front of the decimal point.
• On the European fixed-income market, French government bonds have been outyielding their Spanish counterparts lately for the first time across large parts of the yield curve. The new government in Paris must first prove to the markets that it will now earnestly press ahead with the necessary budget consolidation. Swiss Confederation bonds pulled back toward their year-to-date low in the area of 0.4% in the wake of the sharp inflation forecast adjustment in the Swiss National Bank’s latest monetary policy assessment. In the event of sustained disinflation, it’s conceivable that the yield on Swiss long-term government bonds could head back to the 0% line.
Alternative assets: Saudi-Arabia throws in the towel
• The price of petroleum fell in September to new year-to-date lows beneath the USD 70 mark (WTI) despite the further worsening situation in the Middle East and a two-month postponement of OPEC production hikes that actually had been set to go into effect in October. Leading OPEC member Saudi Arabia now appears to be losing its patience over the persistently low oil prices and the lack of production discipline on the part of other cartel members like Iraq and Kazakhstan. The kingdom apparently is willing to renounce its (unofficial) price target of USD 100 per barrel. To keep from losing further market share to other countries, “quantity over quality (high
prices)” could become the motto going forward. Higher output from Saudi Arabia would suggest a lower long-term equilibrium price in the oil market.
• The price of gold has resumed rallying in recent weeks with increased vigor. The yellow precious metal by now has advanced 30% since the flashing of the technical buy signal in March (when gold broke out of a major triple top resistance pattern). Gold hit new highs in September even measured in terms of the (strong) Swiss franc. Mounting investor interest recently flipped cumulative net inflows into gold ETFs this year into positive territory. Since the opportunity cost of holding bullion is falling, ETF demand for the yellow metal could soon offset the recent decline in the more price-sensitive Chinese demand for gold. Technical chart indicators show a clear path upward for the precious metal.
Currencies: The pound has an interest-rate advantage
• EUR/USD: The 1.12–1.13 level evidently is a tough nut for the EUR/USD exchange rate to crack from both a technical analysis and fundamentals perspective because even though the US Federal Reserve undertook a large policy rate cut in September, it seems less and less likely that the euro can shrink its relative interest-rate disadvantage in the near future. Given the weak economic growth dynamics in the Eurozone, the European Central Bank may have to take swifter action to lower interest rates more forcefully than had recently been expected. Pressure on the part of the markets has already increased substantially.
• GBP/USD: The picture for the British pound looks entirely different. The Bank of England kept its policy rate unchanged in September on an 8-to-1 vote. In contrast to the Eurozone and the USA, the pullback in inflation and wage growth in the United Kingdom is proceeding at a more plodding pace. The BoE’s comments on its interest-rate decision were thus accordingly hawkish, viewing market expectations about future rate cuts as being somewhat hasty. Sterling’s relative interest-rate advantage versus other currencies continues to work in favor of a firm pound for the time being.
• EUR/CHF: The EUR/CHF exchange rate stayed close to its year-to-date low in September at a level below 95 centimes. The third consecutive policy rate cut by the Swiss National Bank to now 1% did not weaken the franc because it had largely been expected. The SNB’s substantial lowering of its inflation forecast (to 0.6% for 2025 from 1.1% previously), which implies additional rate-cutting in the quarters ahead, also did not weigh much on the franc. It is becoming increasingly clear that the wide inflation differential versus the euro, which is a prime driver of the franc’s long-term uptrend, will continue to exist in the years ahead.
The US interest market is back “in plumb” – after a record-long inversion lasting more than two years during which short-term market interest rates exceeded long-term yields, the yield curve is now back to normal again because normally, investors demand a risk premium (read: an extra return) for a longer holding period. In the wake of the surprisingly forceful rate cut by the Fed in mid-September, if not before, the “disinversion” now has become visible and quantifiable: it amounted to almost 20 basis points at the end of September. Can anything about the future performance of the equity market be inferred from this development? Sadly, no. A look at the performance of the S&P 500 index over the last three cycles before and after a disinversion reveals all kinds of variations: a continuation of weak performance (2000 internet bubble), the end of an equity rally (2008 financial crisis), and a continuation of an uptrend (1998 Asia crisis). In these historical examples, the state of economic activity consistently made the crucial difference between a good and a bad stock-market performance. In a nutshell, if there is no recession during the next 12 months, the prospects for the equity market are on the positive side. Unfortunately, estimating the correct probability of a recession ranks among the more difficult duties in an analyst’s job profile.
Chart in the Spotlight
(No) signal from the yield curve | The stock-market outlook depends on the “R” question Performance of S&P 500 index before/after disinversion of US yield curve
Sources: Bloomberg, Kaiser Partner Privatbank
Science has been studying the correlation between money and happiness for decades now.
Theme in Focus On
money and happiness
More money = greater happiness? Everyone ultimately has to decide for him- or herself whether this equation adds up. However, the latest findings from the field of happiness research indicate that a fundamental correlation between money and happiness really does exist up to very high income and wealth levels. A happiness plateau, in contrast, is verifiable only among a small percentage of people. But that isn’t necessarily bad news. On the contrary, knowledge about the correlation between wealth and happiness may motivate people to concern themselves more (or with greater pleasure) with investing their money in the future.
What is happiness?
Science has been studying the correlation between money and happiness for decades now, but “happiness research” is neither pure esotericism nor just a hobby for underemployed academics. This interdisciplinary field of research combines psychology, sociology, economics, and neuroscience, and bases itself on empirical studies. The findings of happiness research have practical consequences – for public policymaking and education, the employment market, the healthcare sector, and for every individual. But what is money (in the research sense)? And how is happiness defined?
In most studies, money is defined as a person’s income. It is easy to measure, and income data are regularly collected across a variety of different demographic groups. In some investigations, on the other hand, wealth (defined as all financial resources) is the subject of consideration. The complex construct of happiness, which the research often defines as “subjective wellbeing,” likewise has two dimensions: emotional wellbeing, which refers to the daily experience of positive feelings (joy, contentment) and negative ones (stress, unhappiness), and life satisfaction, i.e. the answer to the question “How content are you with your life (on the whole)?”
Old certainties…
Due to the different definitions of money and happiness, the spectrum of happiness studies is relatively wide. Nevertheless, some research findings are generally considered established certainties. In one of the most famous studies from the field of happiness research, back in 1974 Richard Easterlin found that although wealthy people within a society are happier than poor people, the aggregate happiness of that society does not trend upward over time as the average income level rises (an observation that came to be known as the Easterlin Paradox).1 Not just absolute income, but also relative income (how much a person earns compared to others) both have an effect on one’s personal fee-
ling of happiness. Another equally established finding is that although satisfaction with life increases as income rises, the incremental gains in satisfaction continually get smaller, a phenomenon called the “diminishing marginal utility of income.”
…and the discovery of the happiness plateau
A study by Daniel Kahnemann (the winner of the 2002 Nobel Prize in economics) and Angus Deaton2 made more prominent headlines in 2010. In their investigations, they not only found a diminishing marginal utility of income, but also an income threshold beyond which happiness in the sense of (day-to-day) emotional wellbeing does not increase any further. They pinpointed that happiness plateau for a one-person US household at an annual income of USD 75,000. The finding that “money can buy happiness,” but only up to a certain point, was picked up by the media with enthusiasm in some quarters and influenced the scientific understanding of happiness.
A study by Andrew T. Jebb et al.3 in 2018 delivered more fodder of the same flavor. Using data from the Gallup World Poll of 1.7 million people in 164 countries, the authors identified not just a plateau in emotional wellbeing, but also in general life satisfaction. Depending on the region and education level looked at, the happiness plateau was located between USD 35,000 (Latin America/Caribbean) and USD 125,000 (Australia/ New Zealand) and between USD 70,000 (low education) and USD 115,000 (high education). In addition, the maximum happiness threshold was a bit higher for women than for men (USD 100,000 vs. USD 90,000). The global average maximum life satisfaction plateau was calculated at USD 95,000. The researchers additionally made another discovery: in some regions, wellbeing declined at very high income levels (above the identified plateaus). Jebb et al. conjectured that the explanation for this observation lied in the elevated expectations, greater stress, or social comparisons that go hand in hand with a high income. Having a lot of money
causes unhappiness – whoever wished to could also interpret this oft-cited, (seemingly) broad-based study from 2018 that way. In any case, it befitted a time in which many people are giving thought to their work-life balance and apparently are increasingly concluding that “money isn’t everything.”
More money equates to more happiness after all
As interesting as the concept of a happiness plateau seemed, certain doubts about this theory of “the unhappy rich” likely existed at least among some recipients of the study back then. The cognitive dissonance presumably afflicting many a reader of that study was resolved at the latest by Wharton School (University of Pennsylvania) senior fellow Matthew A. Killingsworth, who has arguably been one of the most active happiness researchers in recent years. In his 2021 paper titled “Experienced well-being rises with income, even above USD 75,000 per year,” he found that day-to-day well-being and general life satisfaction both continually increase up to an income of (at least) USD 500,000 per year, confirming the findings of earlier studies that found a logarithmic correlation between money and happiness (meaning, for example, that the difference in emotional well-being and life satisfaction between incomes of USD 20,000 and USD 60,000 per year is roughly the same as between incomes of USD 60,000 and USD 180,000 per year).
At the same time, Killingsworth exposed certain deficiencies in the aforementioned studies from 2010 and 2018. He showed that the happiness plateaus observed in those investigations were the result of inappropriate study designs. The income groups in the older studies were categorized in very rough brackets (e.g. USD 60,000–90,000), and all incomes above USD 120,000 were pooled in a single group. Another problem was that emotional well-being was not measured on a continuous scale, but was only differentiated dichotomously between “good” or “bad.” Finally, Killingsworth discerned yet another problem: the old studies ultimately examined the correlation between money and remembered feelings (which were surveyed in retrospect), but not between money and emotions in real time. So, for his own investigation, Killingsworth used a smartphone app that spontaneously pinged the study participants to ask them how they felt right at that very moment. To fix the other design flaws, he collected very granular income data, included also high earners (with incomes of up to USD 500,000 per year), and surveyed emotional status on a continuous scale.
However, Killingsworth, too, can only speculate as to why income correlates at all with well-being. His supposition that people with lower incomes have sources of discomfort that can be eliminated with money is at least very plausible. Equally obvious is the presumption that greater prosperity is synonymous with more financial security (and fewer financial worries). And one last finding also jibes with what’s observable in the real world: the correlation between money and happiness is not equally strong for all people.
Killingsworth researched this last point again in more detail in 2022. In an “adversarial collaboration” with Kahnemann,4 who spotted a happiness plateau for the first time in 2010, Killingsworth made a discovery that further differentiated his previous findings and at least partially rehabilitated the concept of a happiness plateau. That insight on the cutting edge of happiness research is that for the “unhappiest people,” there really is a kind of happiness plateau beyond which a higher income does not bring (almost) any additional happiness. And it’s the exact opposite for the “happiest” people: their happiness actually even accelerates as their income increases.
An evident correlation… | …but not necessarily a causal one Annual income and life satisfaction
As interesting as the concept of a happiness plateau seemed, certain doubts about this theory of “the unhappy rich” likely existed at least among some recipients of the study back then.
Sources: Killingsworth, M. A. (2024). Money and Happiness: Extended Evidence Against Satiation. Happiness Science., Kaiser Partner Privatbank
Means of Wealthy
Means by Income
The outcome of the analysis clearly shows that very wealthy people are much happier (more satisfied) than even the highest-earning income group.
Happiness of the wealthy
Despite all of the insights gained, there is still one question that all of the studies discussed thus far leave unanswered: How happy are the very wealthy whose financial resources add up to amounts well in sevenor even eight-digit territory? Matthew A. Killingsworth devoted himself to examining also that question this year. However, the sparse availability of data proved to be a challenge (Killingsworth conjectured that “Maybe rich people are not inclined to spend their free time doing surveys.”). But he did find two reference points that enlarge the upper spectrum of the previous research (which took annual incomes of up to USD 500,000 into account). One of them is a recent study by Donelly et al.5 that involved over 2,000 participants, of which the median group possessed personal assets ranging between USD 3 million and USD 7.9 million. The other reference point is an influential but smaller study6 in which nearly 50 rich individuals on the 1983 Forbes 400 list of wealthiest Americans participated. Both studies define happiness as satisfaction with life on a scale from one to seven and are compatible with the methodology employed by Killingsworth. The outcome of the analysis clearly shows that very wealthy people are much happier (more satisfied) than even the highest-earning income group. This gives reason to suspect that the (increasing) correlation between money and happiness extends far beyond incomes amounting to several hundred thousand dollars per year. Another compelling finding is that the difference between high earners and the two samples of wealthy individuals is statistically significant (as evidenced by the non-overlapping 95% confidence intervals).
Positive interpretation
What conclusions can be drawn from the latest findings from the field of happiness research? One might be tempted to view the constant correlation between more money and greater happiness as bad news. Maybe it would make life easier if happiness plateaued at a modest wealth level. Then everyone could rationally turn his or her attention to other things once he or she has “enough” money. However, the existence of a happiness plateau would also mean that people wouldn’t be able to imagine things that would improve their well-being, and/or society and the economy wouldn’t be capable of providing them. We obviously do not live in that kind of world – fortunately perhaps. Money contributes to – among many other things – happiness in life. Not for everyone, but for many people. This realization may help people rethink their relationship with investing and growing their wealth. That would give a boost not only to the numbers in their asset accounts, but also to their well-being.
1 R. Easterlin (1974): „Does economic growth improve the human lot? Some empirical evidence“
2 D. Kahnemann, A. Deaton (2010): „High income improves evaluation of life but not emotional well-being”
3 A. T. Jebb, L. Tay, E. Diener, S. Oishi (2018): „Happiness, income satiation and turning points around the world“
4 M. A. Killingsworth, D. Kahnemann, B. Mellers (2022): „Income and emotional well-being: A conflict resolved”
5 G. E. Donnelly, T. Zheng, E. Haisley, M. I. Norton (2018): „The amount and source of millionaires’ wealth (moderately) predict their happiness“
6 E. Diener, J. Horwitz, R. A. Emmons (1985): „Happiness of the very wealthy“
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