What I Care About This Week | 2023 Feb 27

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by Franklin J. Parker, CFA

The Summary

  • Ouch. Last week, risk assets took a dive as investors reassessed the path of the Federal Reserve. Market expectations for peak interest rates keep moving higher and now stand around 5.5% (up from about 4.75% just a month ago). Earnings have also not helped stocks, with profits contracting about 5% over this time last year. A bright spot has been bonds. Higher yields has given investors somewhere to hide with short-term US Treasuries now earnings around 4.8%.

  • This week is a fairly light data week: earnings season is pretty much done, and the main two data points investors will watch are the ISM Manufacturing PMI (a gauge of manufacturing health in the US), and consumer confidence. Manufacturing is expected to continue showing a contraction, while consumer confidence has kept its slump. So far, the fundamental economic data has been flashing warnings to investors. The economy continues to deteriorate, although employment and consumer spending remain stronger than expected.

  • I continue to urge caution and patience. I do expect a recession in the US this year, though I do not see signals that it is imminent. There are numerous headwinds for risk assets (like stocks, high yield bonds, or even cryptocurrencies), but selling everything right now may also be the wrong approach. I am, at the moment, in wait-and-see mode.

The Details

I have a pet theory about real estate.

I remember scratching my head for many years, pre-2020, at the types of real estate deals that I saw getting done. In many cases, I saw office space and apartment complexes that were changing hands at valuations that make little to no sense.

Well, to be fair, the valuations kind of made sense if the interest rate for the debt on the property was below 3%. Those days are over.

Most institutional real estate is financed with a loan that carries a fixed rate for about eight years, then floats based on market interest rates. Which means, when that initial period of a fixed rate expires, many of those real estate valuations won’t make sense at all.

We may then see these sky-high valuations come back down to earth. And that is even before other pricing factors that have started to come into play (like an excess of housing supply that is putting downward pressure on rents, or how hybrid work has lowered demand for office space).

For that reason, I have been underweight real estate, generally, in the portfolios that I manage. I am skeptical of REITs, though I never rule anything out completely. My objective, however, is not to be on the sidelines here forever. I would very much like to step in as a cash buyer when valuations do fall — there are likely to be some good deals on offer!

But, as always, patience here is key.

Chart of the Week

As Monty Python used to say: “And now for something completely different…” This week’s chart shows the top-20 highest grossing films by year, over the past decade. Interestingly, only one since 2012 has been a romantic comedy! Our second chart illustrates how the 2000-2010 decade was a golden-age for the RomCom, but fewer have been made, and — with the exception of Crazy Rich Asians — they have made less and less of a rake over the last decade.

At any rate, the contrarian in me wonders: is the romantic comedy due for a comeback??

sources: Reuters, IMDB, Refinitiv Datastream
sources: Reuters, IMDB, Refinitiv Datastream

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