Alex Pettee, CFA
Markets Pounded • Yields Surge • Ian Eyed
The pain continued for U.S. equity and bond markets Monday as hawkish Fed policy sparked another wave of instability in international markets as volatility measures jumped to post-pandemic highs.
Closing at its lowest levels since December 2020, the S&P 500 dipped another 0.9% today while the Mid-Cap 400 and Small-Cap 600 each dipped back into "bear market" territory.
Real estate equities were hit especially hard today as benchmark interest rates took another leg higher. The Equity REIT Index dipped 2.8% today with all 18 property sectors in negative territory.
A historic plunge in the British pound sent tremors across the global financial system while the U.S. Dollar closed in on its strongest level in nearly four decades.
Ahead of a busy week of Fed speak, the VIX surged past 30 for the first time since June while the BofAML MOVE Index - a measure of interest rate volatility - soared to levels last seen in March 2020.
Real Estate Daily Recap
The pain continued for U.S. equity and bond markets Monday as hawkish Fed policy sparked another wave of instability in international markets as volatility measures jumped to the highest levels since early 2022. Closing at its lowest levels since December 2020, the S&P 500 dipped another 0.9% today while the Mid-Cap 400 and Small-Cap 600 - along with the Dow Jones Industrial Average - each dipped back into "bear market" territory. Real estate equities were hit especially hard today as benchmark interest rates took another leg higher. The Equity REIT Index dipped 2.8% today with all 18 property sectors in negative territory while Mortgage REIT Index slid more than 6% amid a surge in global interest rate volatility.
A historic plunge in the British pound sent hushed tremors across the global financial system while the U.S. Dollar closed in on its strongest level in nearly four decades. The Cboe Volatility Index - a measure of stock market volatility - surged past 30 for the first time since June while the BofAML MOVE Index - a measure of interest rate volatility - soared to levels last seen in March 2020. The 10-Year Treasury Yield jumped another 18 basis points to 3.88%- its highest level since the end of the Financial Crisis. Ten of the eleven GICS equity sectors finished lower on the day with Consumer Staples (XLP) the lone sector in positive-territory. Crude Oil prices dipped another 3% as investors monitor Hurricane Ian which is expected to impact Florida - and potentially impact energy supplies - later this week.
It'll be another busy week of housing data, inflation reports, and "Fed speak" in the week ahead. On Tuesday and Wednesday, we'll see New Home Sales and Pending Home Sales data for August which are expected to echo the continued slowdown seen in Existing Sales and Housing Starts data this past week. We'll also see home price data on Tuesday with reports from Case Shiller and the FHFA but due to the significant lag in these indexes, the full effects of the recent cooldown won't be fully reflected for several more months. On Thursday we'll see the final revision of second-quarter Gross Domestic Product data which is expected to confirm that the U.S. was indeed in a technical recession in the first half of 2022. Finally, on Friday, we'll see another critical inflation report with the Core PCE Index - the Fed's preferred gauge of inflation - which has been one of the early indicators showing signs of peaking price pressures in recent months.
Real Estate Daily Recap
Best & Worst Performance Today Across the REIT Sector
Net Lease: WP Carey (WPC) dipped more than 4% despite a credit rating upgrade from Moody's, which raised its senior unsecured and issuer ratings on WPC to “Baa1” from “Baa2.” In support of its upgrade, Moody's cited WPC's "large and diversified net lease portfolio, prudent approach to capital management, strong fixed charge coverage, and its healthy liquidity position." W. P. Carey's portfolio mix was also highlighted, with the majority of revenues generated from industrial, warehouse, and self-storage properties. As noted in our Net Lease report last week, WPC is among the most "inflation-hedged" net lease REITs with contractual rent escalators covering almost the entirety of its portfolio, of which more than a third are based on uncapped CPI.
Cannabis: Today we published Cannabis REITs: Weeding Out The Weak on the Income Builder marketplace. The previously-high-flying cannabis REITs have been slammed this year on concerns over rent payment from their cannabis cultivator tenants, which have been struggling amid a plunge in wholesale cannabis prices. The 30-50% plunge in pot prices comes amid a flood of new entrants to the cannabis retail and cultivation industry and as institutional capital to multi-state operators has driven production efficiencies. Tighter monetary policy and lack of progress in federal legalization have further stifled capital raising activity and led to a handful of defaults from smaller single-state operators, including several REIT tenants, but we've been encouraged by recent updates which suggest that nonpayment issues remain contained and isolated to a handful of smaller single-state operators.
Mortgage REIT Daily Recap
Per the REIT Rankings Tracker available to Income Builder subscribers, mortgage REITs were sharply lower today amid further pressure on mortgage-backed bond (MBB) valuations and a surge in interest rate volatility. Small-cap agency-focused mREITs were generally hit the hardest today with Invesco Mortgage (IVR) and Armour Residential (ARR) posting double-digit declines. Commercial mREITs held-up better with Blackstone Mortgage (BXMT) and Arbor Realty (ABR) posting more muted declines today.
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