Insights Into Everything REIT
- - $3 Trillion in gross real estate assets in US
- - 290,000 properties included in all REITs
- - 240,000 people are directly employed by REITs
- - 2 million full-time equivalent jobs was the total economic contribution of REITs
- - $52.8 billion of new construction and capital expenditures by REITs
The global expansion in risk assets and economic activity spilled over to both developed and emerging markets. Markets also experienced reduced volatility, especially in US markets, primarily due to continued quantitative easing, accommodative fiscal policy, and strong consumer sentiment.
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US Dollar has been flatlined for 3 years and steadily declining throughout 2017.
The House has currently passed their version of a reform bill and the Senate Finance Committee passed its bill on to the full Senate for a likely vote this week. Indications are that the Senate will pass its bill, triggering the reconciliation process between the two Houses of Congress. It is expected that this process will be difficult, but many experts believe a compromise bill will be passed during the first quarter of 2018.
If so, this may thrust the US Dollar above its 12-month resistance and head higher.
In addition, the passing the Tax Reform bill may also push small caps higher, especially if the US Dollar appreciates. Coincidentally, small-caps just broke above their 10-year rising resistance level, a bullish indicator:>
While equities in the US have lost a little steam over the past few weeks, US large caps still remain in an intact upward trend:
Mid-Caps and Small-Caps have taken a brunt of the softness due to a weak US dollar and uncertainty around a tax reform bill being passed, which would primarily benefit both Mid- and Small-Caps.
On the economic front for the US, the Empire Manufacturing Index recently soared to its highest level since September 2014.
Retail Sales also rebounded more than expected in July.
As US equities and economic data continue to slowly push forward and bring positive news, inflation has yet to catch hold. Recent inflation data has been weak, much weaker than expected by Fed officials.
However, market participants believe the Fed will begin to monetize its balance sheet soon, which could begin as early as September.
With the weak inflation data, December would be the earliest for the Fed to hike rates next, but this still remains uncertain. The bond market is currently pricing in a 42% probability of a rate hike in December 2017.
The markets delivered quite a strong and stable performance for the first half of 2017, with the S&P 500 up 9.34%. While US markets continued to improve, markets overseas have performed even better. International markets are up almost 15% year-to-date and the emerging markets (C) are up over 15%. The Barclays Aggregate Bond Index is also up 2.27% on the year, even as the Fed hiked rates twice this year.
While the political front remains combative, nothing has erupted to destabilize the markets. The US is in the midst of a battle over healthcare and tax reform as well as the administration dealing with accusations of "collusion" with Russia. Europe is still reeling from a series of terrorist attacks in the U.K., as well as sparing over Brexit negotiations and dealing with a debilitating refugee crisis. Finally, North Korea's continues to increase its status as a rogue state by continuing its program of launching transcontinental nuclear warheads. That being said, not only have the U.S. and international markets been comparatively devoid of turbulence, they are exceedingly surpassing previous growth expectations and continue to show signs of further improvement. Within the United States, as well as globally, nearly all leading economic indicators show healthy signs of economic growth.
Leading Economic Indicators for the U.S.
The confidence of corporate America also continues to rise, primarily due to the ease of demands from job-killing regulations, which is enabling companies to concentrate on development, innovation and growth instead of being burdened by over-regulation as we have seen over the last couple of decades, especially the last administration. As a result, while we are still quite late in a lengthy economic growth cycle, the expansion seems to be strengthening instead of evaporating. Atlanta's Fed is predicting a 2.6% growth rate for Q2. Jobless claims for the third week of June came in at 238,000, marking two years which claims have stayed below 300,000. This stretch in lack of jobless claims hasn’t happened since 1970.
The Fed hiked rates to 1.00 – 1.25% in their June meeting, which is the second hike this year following the hike in March from 0.75% - 1.00%. The absence of a negative effect from these hikes on the market reinforces investor’s optimism on the economy. The CME Group expects the next likely fed rate to be in December 2017, current at 45.2% chance of a 1.25% - 1.50% rate.
Effective Funds Rate
Outside the United States, Europe is notching growth that is solid, and indicators ranging from borrowing to Purchasers Managers Indices are positive, signaling more good news to likely come out of the Eurozone. With the election of Emmanuel Macron as President of France, the fear of Europe sidestepping away from capitalism and open markets has ended. Furthermore, the threat that the EU departure of Britain would be emulated by other countries has for the most part evaporated. Besides Macron’s win helping unite the European Union, Mr. Macron is trying to retool over 3,000 pages of labor regulations broadly blamed for reduced labor and France’s slow-growth economy. With the positive prospects for the Eurozone, European equities are finally heading higher, up over 13 percent in the first half of this year, after having been in a slump since 2014.
China is currently stabilizing, contributing to the speed of expansion for Asia. The latest GDP out of China was 6.9%, reaching its highest level from the third quarter of 2015. China continues to evolve from an export-driven manufacturing economy towards a domestically-driven service-based economy. This transformation will hit some speed bumps that may be substantial, but the transition remains resilient thus far and indicates a hard-landing remains unlikely, at least for the foreseeable future.
As China’s economy improves, further south in India, major government reforms are underway led by Narendra Modi, India’s Prime Minister, who is determined to reform the country’s complex and arcane tax system. These aggressive and recently successful economic and financial reforms have coincided with Mr. Modi’s fallout from the crackdown last November on the black market, which voided close to 90% of country’s cash and caused growth to stall. However, while painful over the past year, these reforms are likely to provide the frameworks of sustainable growth in the future.
The continuing global expansion, which is the strongest it has been in a decade, should provide spillover advantages to the US. For example, multinational corporations should directly benefit global growth along with the currently soft US Dollar. The global expansion also gives the Fed more flexibility as it attempts to wind down its $4.5 trillion balance sheet generated as part of their colossal stimulation effort during the fiscal crisis.
Fed's Balance Sheet
Economic prospects are positive as we head into the next half of this year. The political environment in the US as well as in Europe may remain combative and will continue to warrant attention, yet typical risk indicators remain below historic averages. The current mix of pro-growth policies, ample liquidity and future growth expectations have pushed equity valuations up leaving less room for future long-term growth at these levels. However, prices may be justified if Trump can deliver on expectations concerning healthcare and tax reform. A shift or failure to deliver on market expectations may propel markets in a different direction. Equity markets rise like stairs and fall like elevators, so it’s important to not become complacent and keep a close eye on current investment opportunities and risks.
Global Industrial REITs
Apartment / Multi-Family REITs
Global Net Lease REITs
Global Office REITs
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