Stock Prices and CRE

Keep in mind that approximately 80% of all stock trades are executed by algorithms. Also that most computer driven funds have underperformed the market this year. Seems odd since they are 80% of the market, but it is the case.  Hedge funds have also way underperformed the market. Nobody should panic with the substantial drop in stock prices in October. This is the month when major stock prices always occur. The economy remains on a very strong track at 3.5% growth and consumer and business confidence are at or near historic highs, and unemployment is at a historic low if you consider the last times it was this low was the Korean War and Vietnam when a large segment of the male working population was drafted into the army thereby lowering the unemployment rate artificially. Many companies report that the only reason they are delaying new capital expansion is they cannot find anyone else to hire to work on new production lines or in new offices. The ten year remains stable around 3.1% and oil prices continue to fluctuate between $66 and $71, and look to be stable for a long time as the Saudis committed to increase production.  Likely Trump agreed to not put too much pressure on for the murder if the Saudis keep oil around $66-$70.

Inflation measured by the more accurate Personal Consumption Index (PCE) that the Fed uses, it only at 1.6% for core inflation. There is a long way to go before core inflation is materially above 2%. Meantime, pressure is mounting from Trump and Wall St to slow rate increases maybe in March, and to give the stock market some hope for a lower rate going into later 2019 than what everyone has been led to expect by the Fed.  The political and fiscal battle in the EU over Italy, the US election in November- if the Dems get the House it is a big negative on the economy- and the slowing economy in France and Germany. Combined with the chance Brexit will go hard in March and the very likely exit of Merkel next year, means the EU will be unstable for a long time. That has to give the Fed pause. Add on a real slowdown in China, the slowdown in US housing, and the Fed will be under increasing pressure not to raise three times in 2019. In summary, there is a reasonable possibility the Fed will not raise in March, but way too early to predict.

With the world so uncertain, and the US economy doing about as well as it has ever done, the US will remain the haven for the rest of the world. While capital into US real estate has slowed materially due to the Chinese almost disappearing, there will still be demand for offshore for US hard assets as a haven.  There will also likely be a demand for real estate asset opportunities from US investors spooked by the stock market. Despite rising rates, it would seem US CRE values will remain stable for quite a while unless the Fed pushes three increases in 2019.

Starting with the election in a week, there are so many black swans now circling that making forecasts is very difficult. If the Dems do get the House, then that is bad for the economy and politics in America, and we will have a nightmare scenario of enormous division and stupid battles over investigations and impeachment proceedings. Democratic control of the House is a bad script for CRE. I believe the Republicans have a shot to retain control by one seat and to pick up 4 seats in the Senate. If that happens then Trump can make judicial appointments and get some things accomplished by executive order. The stock market will go up materially and business will feel much more confident. Forget your politics, and vote your bank account.

The views expressed here are the author’s own and not that of ALM’s real estate media.