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■ Volatility in the financial markets over the last few months has been caused by concerns about a slowdown in global economic growth and policy uncertainty that includes the potential for increasing tariff fights.
■ Despite the volatility in stocks and unexpected rally in Treasury prices, economic fundamentals such as employment and GDP remain healthy.
■ Demand for real estate such as multifamily is not likely to fluctuate much in the short term, and volatility could even bring capital into the sector
Writing about the financial markets is a sober task and usually not anything like, say, writing about sports or the weather, which change from day to day (or even faster). However, the last few months have turned that idea on its head.
Financial market volatility exploded in the fourth quarter of 2018, and has continued into 2019. Stock market indexes gyrate wildly, sometimes daily, and bond prices have rallied unexpectedly.
The whipsaw changes are disturbing markets, and clearly investors are spooked. Markets are reacting to policy uncertainty, resulting in the continued flattening of the yield curve. The Fed has been on a steady course, increasing interest rates quarterly since the end of 2016. However, the 10-year Treasury has fallen 60 basis points in the past two months, and the spread between overnight rates and the 10-year is now down to roughly 15 basis points. Fed Chair Jerome Powell recently indicated that the Fed may slow its tightening in 2019, and as a result, both equity and bond markets bounced back quickly.
Growth is slowing in countries around the world, including China, where banks are tightening credit and U.S.-based companies such as Apple have seen reduced sales. The growing threat of a trade war is also generating headlines. Meanwhile, Europe’s economies are expected to slow this year, and it’s hard to see a happy resolution to Brexit, although it needs to have some type of determination by the end of the first quarter. Countries in the Americas are also facing crises.
The obvious question is whether the volatility is a sign of a coming recession. Despite the economic headwinds, fundamentals of the economy have remained relatively solid. December’s job growth was excellent, and unemployment is near historical lows. Wage growth, consumer spending and inflation are healthy. Business confidence being down is never a good sign for the economy. But while it is likely that GDP growth will decelerate in 2019, the economy remains far from a recession.
Another important question is what this means for commercial real estate. In the short term, very little. Space demand for property types such as multifamily, office and industrial is based on long-term drivers and isn’t likely to change much. U.S. commercial real estate is a favored asset for global investors, and volatility in stocks and bonds might even draw more capital into the sector, especially for stable assets and primary markets. Investors should have strong operations and management in place, but fundamentals are unlikely to change soon.
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