Jonathan D. Miller Jonathan D. Miller

It’s a problematic time where figuring out where markets are going becomes especially difficult. The economic recovery has been relatively weak, but sustained. The official unemployment rate is about has low as it ever goes, but wage growth has been anemic and many Americans are falling behind as they pay more for healthcare, receive fewer benefits, and face higher taxes, especially at the state and local levels (property and sales taxes as well as various fees for services go up, up, up). The primary election results point to the economic uneasiness lacing the country—Trump and Sanders voters see the deck stacked against them—older white blue collar voters think they are losing ground, while the younger cohort faces obstacles in setting a successful future course—high student debt is just one of them. The world scene looks especially dicey—when economies go south (China, Russia, Saudi Arabia) governments seek conflicts to distract their restive populations. The UK possibly abandoning the EU and the ongoing migrant crisis leave an already weakened Eurozone on edge. The bubble has popped in Brazil, and India is endless hype. Overlay all of this turmoil with the threat of Islamic terror and add in a dash of climate change with a bit of Zika virus, and the recipe looks like a stew for dragging down global growth.

And then note, corporate profits are off especially in tech, banks and the energy industry, big parts of the US economy. The important housing sector has improved, but not enough to lift the confidence of mortgage saddled homeowners to turn back into reckless, credit binging consumers. Notably Macy’s and Nordstrom headline what is becoming the chronic lagging performance of bricks-and mortar department stores. For all the noise about the Fed, interest rates remain very low, because our financial state is more fragile than anyone would like to admit since harpooning confidence is just not good for anyone’s business.

In real estate, players now  talk about entering the cycle’s late innings—cap rates have lowered to uncomfortable limits for prime properties, funds’ buying appetites have slackened, and fund managers find it a bit harder to raise capital. “You think more than twice about doing deals.” Developers should also think long and hard about breaking ground.

There certainly seems to be somewhat more discipline than in past cycles when investors blindly ignored warning signs and irrationally plowed ahead into disastrous over-priced deals and high-risk projects.  Any investment slowdown now may help insulate the markets from a hard fall— certainly a period of lackluster returns with little or no appreciation would be preferable to suffering through sharp value declines. That may be possible, if some measure of restraint can take hold even more firmly.

But it’s hard for a transaction-oriented business, predicated on putting money to work, to pull back consciously and willingly face lower profitability. Deal guys, lawyers, bankers and brokers don’t easily volunteer to head to the sidelines and turn their backs on bonus checks. Investment managers rarely look to play it safe and give money back rather than the norm—“let me reinvest for you or better yet give me more so we can double down on recent gains.”

What happens over the next year will be critical in determining whether the next downturn is a soft landing or the usual crash.