Market Commentary | November 8, 2021

by | Nov 8, 2021 | Market Commentary |

Over the last few months, two topics have dominated economic/investment debate:  the pace and strength of economic recovery and surging inflation.  After just a half hour’s television broadcast, the topic count was reduced to only one.

In his appearance on CNBC’s Squawk Box this morning, Dr. Scott Gottlieb declared that the “End of the COVID pandemic is in sight.  He was commenting on the imminent FDA approval of Pfizer’s protease inhibitor drug Paxlovid and its high efficacy in preventing hospitalization or death in people at high risk of contracting severe COVID-19.

Ten minutes later, the same program shared the Labor Department report that 531,000 new jobs were created in October bringing the unemployment rate down to 4.6%.  The same report detailed that the average hourly wage for private sector workers rose 0.4% over the prior month and 4.9% compared to the year ago period. This rate of wage inflation is more than twice the Fed’s 2% overall target.

Labor costs are not the only prices rising. The Case Shiller National Home Price Index is up 19.8% Y-O-Y.  West Texas Intermediate Crude (WTI) is up 67.95% year to date. If you’ve been to the grocery store, you know that almost every item in your shopping cart is going to cost you more.

As investors we’re concerned that inflation is going to erode the purchasing power of our capital and the income it produces. We are looking for assets that will hedge against the deleterious effects of inflation. In certain circumstances, real estate works wonderfully in this hedging capacity.

We are now about ¾ through 3rd quarter earnings season and the results demonstrate how various property types respond to the changing economy.  Multifamily housing, industrial/logistics, and even retail sectors each reported high single digit rent roll-ups in renewal leases and rate gains of as high as 20% on new lease signings.  Higher grain and lumber prices translate to higher lease rates on our farmland and more profitable harvests on our timberland, respectively.

For REIT investors this creates a virtuous cycle. Higher rents become higher earnings. Higher earnings afford dividend increases. Dividend increases translate to higher share prices.  Real estate doesn’t just hedge against inflation, it can capture it.

So far this year more than 80 equity REITs have hiked their dividends, some more than once.  We own many of them. We seem to be in the right places but will keep our eyes open for new opportunity in the changing environment.

 

Notes and Disclosure

Articles are provided for informational purposes only. They are not recommendations to buy or sell any security and are strictly the opinion of the writer. The information contained in these articles is impersonal and not tailored to the investment needs of any particular person. It does not constitute a recommendation that any particular security or strategy is suitable for a specific person.

Investing in publicly held securities is speculative and involves risk, including the possible loss of principal. The reader must determine whether any investment is suitable and accepts responsibility for their investment decisions.

Commentary may contain forward-looking statements that are by definition uncertain. Actual results may differ materially from our forecasts or estimations, and 2MCAC and its affiliates cannot be held liable for the use of and reliance upon the opinions, estimates, forecasts, and findings in this article.

Past performance does not guarantee future results. Investing in publicly held securities is speculative and involves risk, including the possible loss of principal. Historical returns should not be used as the primary basis for investment decisions. Although the statements of fact and data in this report have been obtained from sources believed to be reliable, 2MCAC does not guarantee their accuracy and assumes no liability or responsibility for any omissions/errors.

We routinely own and trade the same securities purchased or sold for advisory clients of 2MCAC. This circumstance is communicated to clients on an ongoing basis. As fiduciaries, we prioritize our clients’ interests above those of our corporate and personal accounts to avoid conflict and adverse selection in trading these commonly held interests.

Hypertext links to other sites are provided strictly as a courtesy. When you link to any of the sites provided on our website, you are leaving this website. We make no representation as to the completeness or accuracy of information provided on these websites. Nor is the company liable for any direct or indirect technical or system issues or any consequences arising out of your access to or your use of third-party technologies, websites, information, and programs made available through this website. When you access one of these websites, you are leaving our website and assume total responsibility and risk for your use of the websites to which you are linking.

Share This