(New York)

The US stock market had a stellar 2017, with S&P 500 soaring 21.8% in the year. However, while still rising, REITs lagged far behind at just 8.7%. This year, the bad news has continued, with stocks overall up 6% and REITs down more than 2%. The underperformance has led to a debate amongst REIT managers as to why times are rough. Some think that it is because of the view that we are in a rising rate environment and the perception that there is a coming surge in new office buildings, apartment complexes, and storage units. Others, though, think that REITs are simply being forgotten because the big party has been in tech shares.

FINSUM: We do not think REITs are being forgotten, we just think they are getting less attractive because the both the macro cycle (higher rates coming) and their industry cycle (there is more inventory now) are shifting.

(Washington)

One of the weakest and most questionable aspects of the recent tax package was the federal government’s new policy to limit state and local tax deductions (referred to as SALT). The change is rules meant that total tax bills for residents of higher tax states were set to soar. Unsurprisingly, these states, including huge payers New York and California, are devising work arounds, such as making state taxes a donation, which makes them fully deductible. Or they could eliminate income taxes and boost payroll taxes. If states adopt such tactics, it will leave a gaping estimated $154 bn hole in the US Treasury’s budget over the next eight years.

FINSUM: This was a big unforeseen consequence of the tax policy that could have a major impact on the budget. Congress is probably going to have figure something out.

(New York)

Goldman Sachs is going on the record warning of “extreme” optimism in markets after stocks’ torrid start to the year. The bank says its cross-asset measure of risk appetite is the highest it has been since 1991 (!). The bank says the risk of losses is higher now, but that in their experience, signals from the macro economy tend to trump signals from risk appetite. Therefore, given that the world’s economy is moving nicely, the market may have more room to run. That said, Goldman is nervous about markets, saying “Risk appetite is now at its highest level on record, which leads to the question of what future returns can be”.

FINSUM: We think this grey-haired bull market still has some juice in it, but our big fear is how hard a recession might hit the markets (given high valuations), not just the economy.

(New York)

While everyone expects that we will have a recession at some point, and likely a significant correction, one of the big questions regards the depth. The Wall Street Journal has something to say about this issue, as the paper is arguing that the next recession is going to be brutal. The reason why is that the government won’t have as much firepower to stimulate the economy in coming years. That is because the newest tax package will send the deficit surging, and there will not be further room to cut once the recession takes hold, eliminating one of the government’s main weapons in combating recessions.

FINSUM: This makes sense to us. Several weeks back we ran an article where an analyst said he loved the tax cuts, but wished they could have been saved for the next recession. We couldn’t agree more.

(New York)

Some analysts are growing increasingly wary of the real estate market as valuations continue to rise higher. Now, more fringe signs that the market might be getting toppy. A new practice is being favored by Wall Street that looks like a sign of froth—so-called “drive-by” valuations. The practice involves local real estate agents driving by properties to do valuations at glance. Much cheaper than traditional appraisals, they were outlawed for use in regular mortgages after the crisis. However, at the institutional buying level, they are still allowed and thriving. The Wall Street Journal sums up the scale and shoddiness of the practice best, saying “Now these perfunctory valuations abound, underpinning tens of billions of dollars of home deals. Sometimes the process is outsourced to India, where companies charge real-estate agents a few dollars to come up with U.S. home values by consulting Google Earth and real-estate websites”.

FINSUM: This is an absolutely terrible idea, and is exactly the kind of pooling practice that leads to dangerous buildups. Foreign companies doing US home valuations with Google Earth? Sounds like a recipe for disaster.