Expansionary but… The US economy is still expanding, albeit at a slower rate. The third estimate of Third Quarter GDP growth came in at 3.4% while Fourth Quarter GDP growth is projected by the Federal Reserve Bank of Atlanta to slow to 2.8%. According to the Bureau of Labor Statistics, changes in total nonfarm payroll in the past three months were 312,000, 176,000 and 274,000, respectively, an average of 254,000, better than the average of 211,500 for the 12 months prior. Despite the positive GDP and job growth, the long end of the yield curve actually declined as the yield on the 10-Year Treasury Note went from 3.056% on September 30 to 2.686% on December 31; the yield curve flattened with the spread between the 3 Month Treasury Bill and the 10 Year Treasury Note (identified by recent research from the Federal Reserve Bank of San Francisco as the “best summary measure” of the potential for a recession in the US economy) tightening in Fourth Quarter from 86 bps to only 31 bps.
Global property securities had their weakest quarter of the year to end 2018, with December being a particularly painful month for equity investors across almost all asset classes globally. FX movements had a slightly negative overall impact on USD returns in the quarter, but were more material for the full year with a local currency (LC) total return for the Index of -3.3%. The theme of synchronized global growth that had been prevalent in 2017 and early 2018 had faded by year end as investors shifted to worries of a synchronized global slowdown. Investor concerns over global trade wars, a China slowdown, declining oil prices, Brexit and central bank tightening became too much for the market to ignore in December. A more hawkish than expected initial tone from the US central bank in December in the face of so much uncertainty and a partial US government shutdown to end the year were the final straws for investors as they appeared to take a step back, reduce risk and wait for better visibility on the outlook for 2019. Notwithstanding the broader market selloff, real estate operating conditions remained mostly stable in the quarter, but with the retail sector continuing to have the weakest outlook. The discount at which most property securities trade relative to private market values provides some buffer for investors as they search for clarity on the economic outlook going forward and the impact on property fundamentals and valuations.