US Equity Markets Face Turbulence Amid Rising Interest Rates and Soft Earnings
Declining Equity Markets and Rising Interest Rates
Last week witnessed significant declines in U.S. equity markets, primarily driven by the potential for additional Federal Reserve rate hikes and disappointing corporate earnings results. The prospect of higher interest rates and soft earnings has created turbulence in the market, causing concerns among investors.
Impact on REITs and Homebuilders
The Equity REIT Index and Mortgage REIT Index both experienced substantial declines due to rising interest rates. This surge in rates has had a major impact on homebuilders as higher mortgage rates have started to affect housing market data. The real estate investment trust (REIT) sector, including companies like Equity LifeStyle (ELS), Prologis, Crown Castle, SL Green, VICI Properties, and Alpine Income, all reported declines. Additionally, private equity firm Blackstone saw a decline after reporting soft earnings results. Residential mREIT Orchid Island faced pressure due to rising benchmark interest rates and downward pressure on mortgage-backed securities (MBS) valuations.
US Treasury Yield and Rate Hike Expectations
The 10-Year Treasury Yield surged to its highest close since 2002, reflecting the market’s reaction to rate hike expectations. Jerome Powell, the US Federal Reserve chairman, stated that robust economic activity could complicate the Fed’s decision to halt rate hikes. This confirmation has led investors to discard expectations of a near-term rate cut and anticipate high interest rates for a longer duration.
Investor Concerns and the US Economy
Investors fear higher-than-expected rates due to the growing US budget deficit, which might force more bond issuance, thereby shifting the supply-demand balance. Despite the rate hikes, the US economy has shown resilience against higher interest rates, attributed to a significant increase in household wealth since 2020. The surge in household wealth, driven by surging equity markets, rising house prices, and substantial government relief packages, has sustained spending and economic growth.
Challenges for Bond Investors
The Bloomberg US Bond Index continues to decline, generating negative total returns this year. Bond investors are closely watching upcoming earnings reports from companies like Dynex Capital and KKR Real Estate to gauge the market’s performance.
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