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Market updates

July 14, 2023

Inflation Cooled, Commercial Real Estate Under Pressure

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What's happened recently?

Markets were mostly flat over the past two weeks as they digested mixed economic data that was published around the 4th of July and now await Q2 corporate earnings to be reported over the coming weeks. Bond markets experienced some volatility as rates first rose in anticipation of further rate rises this year and then fell as consumer price inflation came in below expectations. 

Here are a few things standing out in the news:

Why is this important?

The U.S. economy continues to see slow but steady growth, showing resilience despite the Fed raising rates from near zero to above 5% over the past 18 months. We continue to see mixed signals from a diverse set of economic indicators.

  • Consumer prices grew less than anticipated in June, providing much needed relief to the markets as the details were unambiguously positive and hinted at inflation becoming less entrenched. Investors will be keen on whether progress on inflation will get harder and what the Fed will do if the chances of a soft landing keep rising.
  • U.S. payrolls grew at a slower pace than expected in June while previous months’ figures were revised down. Markets reacted negatively as employment numbers had been coming in above expectations for several months. Despite this weakness, the 3.6% unemployment rate remains historically low and wage growth remains strong, signaling a still hot labor market and giving more leeway for the Federal Reserve to consider raising rates on July 26th.
  • The beleaguered manufacturing sector remains under pressure, showing a contraction for the eighth month in a row. The sector is dealing with tighter credit conditions, a weakening outlook for demand and inventory build up. The services sector remains the bright spot for the economy and relatively impervious to higher interest rates, so far.

What's our take?

We believe the economy is still fragile and while the consumer remains the key pillar for growth, other parts of the economy are showing cracks. We expect markets to remain volatile as investors parse through second quarter earnings and outlooks over the next few weeks and vacillate between views around a softer or harder landing. Earnings expectations for the next couple of quarters have steadily been revised higher, creating a higher hurdle for corporations to beat.

Commercial real estate (CRE) has been under significant pressure over the past few quarters as interest rates bite. Our view is that the state of real estate is not one thing but a collection of many. Rising interest rates have introduced significant challenges to the industry, and we think some property types (like multifamily residential and industrial) are better positioned to succeed in this environment. Others (like office and retail) are facing secular headwinds that may persist for some time. Should higher interest rates persist, we may see more stress paving the way for opportunistic specialists.

Though the future remains unclear, we continue to recommend real estate investments for clients as a diversifier to their asset allocations. We source and continue to recommend, where appropriate, illiquid and semi-illiquid private investment opportunities in the multi-family, net lease, and opportunistic spaces. Investing across types, stages, and market cycles is critical to maintain a healthy amount of diversification.

Source: Green Street, Compound Financial as of 5/31/23.

For more information, please check out further disclosures here. Investment advisory services are provided by Compound Advisers, Inc. (“Compound Advisers”), an SEC-registered investment adviser (CRD# 306341/SEC#: 801-122303). Registration as an investment adviser does not imply any level of skill or training. The information contained in this communication is provided by Compound for general informational purposes and should not be considered as financial or tax advice, or an offer to sell securities to you. All investing involves risk, including the possible loss of any or all of the money invested, and past performance never guarantees future results. Please see Compound Advisers' Form CRS here , and ADV Part 2A Brochure here.