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U.S. Equity Markets Suffer Amid Rising Interest Rates and Declining Corporate Earnings
Last week, U.S. equity markets registered significant losses. Key contributing factors were the threat of impending Federal Reserve rate hikes and lackluster corporate earnings. The 10-Year Treasury Yield hit its highest level since 2002, while the CBOE Volatility Index achieved its peak since mid-March.
Repercussions on the REIT and Housing Sector
The Equity REIT Index and the Mortgage REIT Index both suffered notable declines due to the skyrocketing interest rates. This spike in rates has not been kind to homebuilders either, with increasing mortgage rates beginning to impact the housing market data.
Individual Performance Among REITs and Equity Firms
In the midst of this turmoil in the REIT sector, Equity LifeStyle (ELS) managed to keep its head above the water, despite the market upheaval. However, firms like Prologis (NYSE:PLD), Crown Castle (NYSE:CCI), SL Green (SLG), VICI Properties (NYSE:VICI), and Alpine Income (PINE) succumbed to the market downturn. The private equity firm Blackstone (NYSE:BX) also faced a decline following unsatisfactory earnings reports. Simultaneously, the Residential mREIT Orchid Island (ORC) faced headwinds due to increasing benchmark interest rates and falling MBS valuations, mirrored in the drop experienced by the iShares Mortgage Real Estate ETF (REM).
Fed Chairman's Statements Influence Bond Yield
The 30 basis point rise in the US 10-year bond yield to 4.93% last week was mainly driven by comments from Jerome Powell, the U.S. Federal Reserve chairman. He mentioned that strong economic activity has made it challenging for the Fed to halt rate hikes, confirming that interest rates in the U.S. are likely to stay elevated for a substantial duration.
Factors Driving the Upward Trend in Bond Yields
The increase in bond yields since August is primarily due to investors' foresightedness regarding the direction of short-term rates and the premiums for holding long-term securities. The economic indicators that affect these expectations include the soaring U.S. budget deficit, which could necessitate increased bond issuance, thereby disturbing the market equilibrium.
US Economy's Resilience and Upcoming Key Earnings Reports
Despite the increasing rates, the U.S. economy has displayed resilience, thanks to a considerable rise in household wealth by roughly $US43.4 trillion or 30% since 2020. This growth was revealed by the Fed’s Survey of Consumer Finances, which found that American family wealth skyrocketed between 2019 and 2022. This increase, backed by rising equity markets, house prices, and substantial government aid packages, has spurred spending and economic expansion. In these times, the Bloomberg US Bond Index is continuously falling, generating total returns of -3.1% this year. Investors are keeping a keen eye on the upcoming earnings reports from Dynex Capital (NYSE:DX) and KKR Real Estate (KREF).
