Global synchronous recovery seems to be the financial community’s mantra for 2017, used to ward off evil spirits associated with tightening monetary policy, particularly in the US. Although Balkanization across the globe and climate change pose great long-term threats, their symptoms (Charlottesville, Catalonia and the severity of Hurricanes Hugo and Irma) resulted in only short-term market volatility and, thus far, prospects for tax cuts has certainly trumped (pun intended) the threat of a nuclear strike from North Korea.
Economic data released during the quarter was mixed. The third estimate of Second Quarter GDP growth came in at 3.1%, compared to 1.2% for First Quarter 2017 and average GDP growth of 1.9% and 1.6% in 2015 and 2016, respectively. According to the Bureau of Labor Statistics, changes in total nonfarm payroll in the past three months were 138,000, 169,000 and -33,000 (hurricane impacted), respectively, an average of 91,000 compared to an average of 185,000 for the 12 months prior. The yield on the 10-Year Treasury Note rose from 2.302% to 2.326%.
The Wilshire US REIT Index (“Index”) was up 0.6% in Third Quarter, lagging both the S&P 500 and Russell 2000 Indices which advanced 4.5% and 5.7%, respectively; this is the fifth consecutive quarter of REIT underperformance. The majority of the constituents in the Index produced positive returns (67 out of the 115 constituents). The best performing REIT, Cedar Realty Trust, was up 17.0% and the worst, Taubman Centers, was down 15.6%.
In terms of relative performance by sectors, as in Fourth Quarter 2016 when investors first became enamored with prospects for “Trumpflation,” the length of the lease term was certainly influential as landlords with shorter duration leases like Storage and Hotels outperformed the more interest rate sensitive sectors like Health Care. Property types with secular demand drivers like Industrial and data centers continued to outperform while all three shelter categories lagged: Apartments, Manufactured Housing and Single Family.
Many market commentators are suggesting that with an improvement in economic activity and positive fourth quarter seasonality, risk-on factors like Value might start to outperform defensive factors like Price Momentum. Is the burgeoning outperformance of the Retail a sign of reversion to the mean for the beleaguered sectors? Since the 2008 financial crisis, Retail REITs have had a tendency to underperform in the fourth quarter, perhaps as a result of investor concerns about each holiday season. However, expectations are very low currently and, in reality, store closing should abate until January as even struggling retailers hold on through the end of the year. With the pace of economic activity rising and a tight labor market (4.2% unemployment rate), doesn’t wage growth (2.9% for the past 12 months) lead to increased consumption as the wealth effect spreads?