Sources: Rates Data and Economic Calendar—Bloomberg Markets as of 3/9/15; Equity Market, Fixed Income and REIT returns from JP Morgan as of 3/6/15.
Friday’s Sell-Off Reminiscent of 2013
Last week, U.S. stocks suffered the second worst weekly loss of 2015 with the S&P 500 falling 1.58% over the 5 day period while the yield on 10 year treasuries increased 24 basis points, the second largest weekly increase this year. The U.S. stock market had been see-sawing throughout the week leading up to last Friday’s hotly anticipated jobs report as investors were looking for clues in the monthly release as to when the Fed’s first interest rate hike could occur. As was experienced in 2013 when investors anticipated the commencement of the tapering process, good economic news was bad news for the equity market. Friday’s report showed that 295,000 individuals found work in February and the U3 unemployment rate fell to 5.5% beating the consensus estimate of 5.6%.
As was expected, sectors of the market that are considered interest rate sensitive felt the brunt of the sell-off in Friday’s trading with Utilities and REITs down 3.0% and 3.2% respectively. We continue to believe that sell-offs such as this are overreactions by investors concerned about the timing of the first interest rate hike and overlooking the more important terminal level that rates will reach. We have long contended that the first increase in the Fed Funds rate will occur in the first half of 2015, however, we place more emphasis on where the rate will be at the end of 2015, our expectations are currently 0.75 – 1.00%.
Recent history offers insight as to how the market may react as news develops regarding the first rate hike announcement. Consider when the former Fed Chair, Ben Bernanke announced in May of 2013 that the tapering of bond purchases was on the horizon; the overall stock market reacted very similar to what we saw on Friday. For the week of May 20, 2013 the S&P 500 experienced a broad based sell off of 1.07% while Utilities lost 3.4% and REITs lost 4.4%. Since the end of May 2013, however, utilities and REITs have delivered a cumulative return of 16.2% and 14.1% respectively. We believe this reflects the fact that despite the potential for the Fed Funds rate increasing sooner than some may expect, yields will remain low over the short to intermediate term. The demand for U.S. fixed income securities should stay elevated due to the attractiveness of current yields relative to other developed countries (Spanish 10 year government bonds currently yield 88bps less than U.S. Treasuries!) in addition to the strength of the U.S. Dollar. Investors looking to earn income from their investments will likely still consider the 3.3% and 3.5% yields offered by utilities and REITs (as measured by the ETFs, XLU and VNQ) attractive and their prices should recover.
Return and rate data above from Wells Fargo as of 3/9/15.
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DJ Equity REIT Index represents all publicly traded real estate investment trusts in the Dow Jones U.S. stock universe classified as Equity REITs according to the S&P Dow Jones Indices REIT Industry Classification Hierarchy. These companies are REITSs that primarily own and operate income-producing real estate.