Upside-Down Week As REITs Stumble And Yields Surge

Sep. 14, 2019 5:29 AM ETBX, AMZN, CBL, DIA, FSHOX, HAUZ, PEAK, HOME, ICF, ITB, IWM, IYR, KBWY, NAIL, PLD, REET, REIT.IND, REM, RF, RH, HOUS, SCHH, SNBR, SPY, SRET, SRVR, VNQ, VNQI, VTR, W, WELL, WPGGQ, XHB, XLRE19 Comments

Summary

  • Signs of cooling trade tensions between the US and China sent US equity markets to their third straight weekly gain, edging closer to new all-time record highs.
  • The 10-Year yield surged 35 basis points this week, the largest one-week jump since 2013. Yield-sensitive sectors including REITs, which have led this year’s rally, took a step back.
  • Housing stocks set a series of new record highs throughout the week, jumping another 2%, led by the Home Furnishings, Mortgage Banking, and Real Estate Technology sectors.
  • While lower oil and food prices continue to put downward pressure on the headline inflation data, core inflation has perked up over the last three months.
  • Retail sales came in stronger-than-expected, but largely due to strength in the e-commerce sector. Brick & Mortar retailers continue to struggle with store closings and slowing sales growth.
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Real Estate Weekly Outlook

In what some observers described as an “upside-down” week in the financial markets, US equities climbed for the third straight week as trade tensions between the US and China appeared to cool ahead of the all-important in-person trade discussions in early October. Another week of solid economic data and a show of strength from the Republican party in a closely-watched set of special elections (especially of interest to the Chinese trade delegation) lifted investor optimism and sent the 10-year yield surging to the biggest weekly gain in six years.

Sector and factor rotation have been key themes over the past several weeks with a sharp reversal in leadership groups. In a sharp move that confounded many investors, the high-flying momentum and high-growth factors have significantly underperformed in recent weeks while the beaten-down value and quality factors have suddenly caught a bid, a theme that we’ve observed play out within the REIT sector as well.

real estate outlook

The S&P 500 (SPY) and Dow Jones Industrial Average (DIA) each climbed another 1% this week, pushing the major large-cap benchmarks back to within 1% of all-time record highs. The small-cap Russell 2000 (IWM), which has underperformed for most of this year, surged nearly 5% on the week while on the flip-side of the coin, the high-flying REIT sector took a step back as the broad-based REIT ETFs (VNQ and IYR) dipped more than 2%.

The “upside-down” week was apparent within the REIT sector as the high-flying cell tower sector plunged more than 7% while the struggling mall and hotel sectors saw sizable jumps. Despite mixed retail sales data and the reports of an impending bankruptcy from one of the seemingly better-performing mall-based retailers, Forever 21, the low-productivity mall REITs including CBL & Associates (CBL) and Washington Prime (WPG

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Disclosure: I am/we are long VNQ, ACC, TCO, AMZN, HCP, WELL, HOME, PLD, RF, RH, RLGY, SNBR, WELL. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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