Global pandemic. The third estimate of First Quarter GDP growth was -5.0% and the Federal Reserve Bank of Atlanta projects Second Quarter GDP growth to be -34.7%. According to the Bureau of Labor Statistics, changes in total nonfarm payroll in the past three months were -20,787,000, 2,699,000, and 4,800,000, respectively, an average of -4,429,333 and catastrophically below the average of 67,333 for the 12 months prior. However, since peaking at the end of March at 6.9 million, weekly jobless claims have been declining steadily (and stabilizing at around 1.4 million), a good coincident indicator of the climb back from the Covid-19 related abyss for the US labor market. The 10-Year Treasury Note yield was relatively unchanged from 0.698% on March 31, 2020 to 0.653% on June 30, 2020 as was the spread between the yield on the 3-Month Treasury Bill and the 10-Year Treasury Note declining slightly from 55 bps to 51 bps in Second Quarter.
Risk On (and on!), as Wall Street maintains social distance from Main Street. The COVID-19 (coronavirus) pandemic has led to extraordinary loss of lives and livelihoods during its quick sprint across the globe, with nearly a half million confirmed deaths during the Second Quarter alone. Job losses mounted as businesses shuttered, most dramatically in the US where the unemployment rate spiked from 4.4% in March to 14.7% in April and has since improved to 11.1% in June as cities slowly re-opened. Despite unknowns regarding the ultimate depth, breadth and duration of the virus’ damage to global economies, property securities boarded the “risk-on” equities train and delivered a historically robust quarterly return as expectations of a sharp recovery seemed increasingly likely. The recent International Monetary Fund (IMF) World Economic Outlook projections support this view, with global GDP expected to fall 4.9% in 2020 (with a greater decline in the first half of 2020) to up 5.4% in 2021, including -8.0% to 4.5% in the US, -10.2% to 6.0% in Europe, -10.2% to 6.3% in the UK and -5.8% to 2.4% in Japan, to name a few. Yet the outlook for financial assets and property securities is still uncertain, as the global pandemic is far from over with infections rising in re-opened regions and localized shutdowns becoming the norm. It is often said that real estate houses the economy, an accurate depiction but unfortunate moniker when economists use the Great Depression as a guidepost for current conditions in the US. The silver lining is that listed property companies have prepped for a looming recession during the historically long/10+ year economic recovery leading into the pandemic, selling the weakest assets and reducing leverage. Nearly all property securities are expected to survive (vs. the sharp increase in virus-inflicted corporate bankruptcies) and many are poised to play investment offense if/when distress surfaces in today’s global recession.