Stock Market Volatility Up Amid Rising Interest Rates; Stability of Commercial Real Estate Holds Appeal

 

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Research Brief
October 2018
STOCK MARKET
Developing Trends
Fed remains committed to tightening. Recent comments from the Fed remain hawkish, with a rate hike planned for December and as many as three next year. Core PCE (personal consumption expenditure), the Fed’s preferred inflationary metric, remained at 2 percent in August, matching the Fed’s objective for core inflation.
Unemployment hits lowest rate in nearly 50 years. The September jobs report highlighted a slowdown in overall additions yet posted an unemployment rate of 3.7 percent, marking the lowest rate since 1969. Additionally, job openings recently totaled 7.1 million in August, while the number of people looking for work totaled just 6 million in September.
Commercial leases align with rising inflation. Over the past 12 months, Core CPI has risen 50 basis points to 2.2 percent as economic strength filters into prices. As inflationary pressure builds, many commercial real estate leases have built-in inflation adjustments and lease resets in order to help investors deflect rising expenses for operating the asset, ensuring a more stable return profile.
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Stock Market Volatility Up Amid Rising Interest Rates; Stability of Commercial Real Estate Holds Appeal
Rising interest rates, midterm elections spark stock market volatility. The stock market has fallen roughly 10 percent from its record high reached in early October, while suffering its second-largest single-day decline of the year on Wednesday, Oct. 10. Simultaneously, the S&P Volatility Index (VIX) remains elevated, highlighting continued nervousness among market participants. The stock market correction was precipitated by a quick move in longterm interest rates, carrying the 10-year Treasury yield to 3.25 percent from a prior trading range of 2.85 to 3.05 percent. Lingering concerns over the future of interest rates and uncertainty surrounding the midterm elections remain a significant contributor to market volatility.

Interest rate move has potential to impact the economy.
As lenders and borrowers adjust to the effects of higher debt costs, the potential for credit-related stress among heavily indebted companies increases, raising the prospect of additional volatility in upcoming months.
However, percolating wage growth, stable inflation and the lowest unemployment rate in nearly 50 years highlight a robust economy, evidenced by third quarter GDP reaching 3.5 percent. Meanwhile, volatility remains a key feature of equity markets, encouraging investors to hold a diversified portfolio to reduce the impact on their holdings.

Stability of commercial real estate increasingly appealing for investors. Carrying competitive yields and relatively less volatility, commercial real estate represents a viable alternative to equities. Additionally, property values typically reflect the economic strength of the real economy, underpinned by low unemployment, positive demographics and continued growth in consumer spending, reinforcing a healthy outlook for the coming year. The economic recovery has tightened vacancy significantly across all major property types, while construction balanced with demand has prompted considerable growth in rental rates.

80% Rise in the VIX from Oct. 8 to Oct. 12 1,300 Dow Point Drop from Oct. 10 to Oct. 11
* Through Oct. 12
Sources: Marcus & Millichap Research Services; Moody’s Analytics; Federal Reserve Economic Database; Bureau of Labor Statistics
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The information contained herein was obtained from sources deemed reliable. Every effort was made to obtain complete and accurate information; however, no representation, warranty or guarantee to the accuracy, express or implied, is made.
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