REITs have seen big gains in recent weeks with the FTSE Nareit All Equity index up nearly 12% in November and now green on the year. The major catalyst for recent gains has been increasing certainty that the Fed is nearing the end of its hiking cycle and may begin cutting rates by the second half of next year.

According to the REIT industry association Nareit, this strength will continue in 2024. In its outlook piece for next year it said, “We are cautiously optimistic that despite those challenges, the REIT recovery could begin next year. The impressive performance of REITs during late October and November may be a signal that, as in previous periods of monetary policy adjustments, the end of the rate-rising cycle will herald a period of REIT outperformance.”

Based on historical precedent, REITs have returned 20% over the next year following when rates stabilize which is better than stocks and private real estate. It also forecasts the performance gap between public and private real estate shrinking during this period. However, John Worth, Nareit’s executive VP of research and investor outreach, warns that these returns will be lumpy which means that investors will be rewarded for being in the market rather than timing the market.

Finsum: REIT stocks are seeing a strong rally in recent weeks amid optimism that inflation is falling and that the Fed is done hiking rates. Here’s why some see it extending into next year.

JPMorgan issued its 28th annual Long-Term Capital Markets Assumptions report, which provides long-term forecasts for various asset classes in addition to detailing risks and upside catalysts. One of the recommendations in its report is to add a 25% position to alternative investments which it believes will increase returns by 60 basis points on an annual basis while also reducing volatility. 

In terms of the 60/40 portfolio, JPMorgan is forecasting annual returns of 7% which is a slight decrease from last year’s forecast of 7.2% annual returns. Pulkit Sharma, JPMorgan’s head of real assets and alternative investment strategy, remarked, “The alternative asset classes are becoming more essential than optional in the broader 60/40 toolkit. Inflation is going to be more and more sticky, so you need more diversifiers and inflation-sensitive asset classes.” 

The bank also believes that investors need to seek out diversification especially, since it expects continued geopolitical uncertainty and volatility stemming from central bank decisions. Fixed income is simply not an effective diversifier in higher-inflation environments as evidenced by the last couple of years. Some of the alternative assets it recommends boosting diversification are real assets, hedge funds, and private credit. 

Finsum: In its annual long-term review and forecast of various asset classes, JPMorgan slightly reduced its expectation of long-term returns for a 60/40 portfolio and stressed the role of alternatives to boost returns and improve diversification.

Treasury yields were higher following the November jobs report which showed a bigger than expected decline in the unemployment rate. The report suggests that the labor market remains tight which could prolong the Fed’s hiking cycle. However, the bulk of the gain in yields was given up in ensuing sessions as traders remain more focused on weakening inflation and softer economic growth.

According to the Labor Department, the US economy added 199,000 jobs in November which was just above consensus expectations of 190,000 jobs added and an improvement from an increase of 150,000 jobs in October. The unemployment rate dropped to 3.7% below consensus expectations of 3.9%. Some note that the report was helped by auto and entertainment workers returning to work after strikes. 

Some traders are looking for labor market weakness as the next impetus for the Fed to shift its policy. Clearly, this report dispelled notions that the economy is contracting and provides more ammunition for the ‘soft landing’ hypothesis. 

Wage growth also moderated to fall to 0.4% monthly and 4% on an annual basis. In terms of the economy, government and healthcare were the biggest sources of jobs growth, while the retail sector and transportation & warehousing shed the most jobs.

Finsum: Treasury yields were slightly higher following the November jobs report which came in stronger than expectations. 

According to Citi, energy stocks will struggle in 2024 due to rising spare oil capacity. This is essentially the amount of oil production that can be quickly brought online and sustained for up to 3 months. Historically, energy stocks have underperformed in years with 3 million barrels per day of spare capacity. 

Currently, estimates are for an average of 4 million barrels per day of spare capacity. Due to this, the bank is forecasting oil prices to end 2024 in the low $70s. It notes that despite the formation of OPEC+, spare capacity has continued to rise with 80% of the growth coming from the US. 

YTD, oil prices are down by 4%, while energy stocks are lower by 3% despite production cuts by OPEC. Citi sees OPEC continuing to act to support the price of oil, but it will have to sacrifice market share to do so, especially given that current prices continue to support capacity growth. 

In terms of positives for the sector, it notes that many companies in the sector are in a strong financial position which makes them less sensitive to the higher-rate environment. Additionally, there has been a surge of M&A activity in the sector which should also support valuations. 

Finsum: Energy stocks have underperformed in 2023 amid falling oil prices. Citi sees this continuing in 2024 especially with increasing spare capacity. 

Charles Schwab is forecasting positive returns for fixed income as the economy slows and inflation continues to fall. However, it expects volatility to linger given uncertainty about the Fed’s policy moves. 

Schwab notes that yields have been unusually volatile as the 10-year yield has ranged between 3.5% and 5% over the past 12 months. Yet, it believes that short and long-term yields have peaked for the cycle. 

It sees downward pressure for inflation given that supply issues have abated, while it sees the impact of tighter monetary policy continuing to materialize, also adding to downward pressure on inflation. Despite this bullish forecast for bonds, it doesn’t see a return to the pre-Covid era of low rates and quantitative easing (QE). 

In terms of economic growth, Schwab notes some risks as high real rates are impacting the economy as they create more incentives for consumers to save rather than spend. Two more  headwinds are tighter lending standards at banks and the Fed continuing to unwind its balance sheet. Another factor contributing to volatility is that the Fed could elect to keep rates higher as it wouldn’t want to squander gains made in the fight against inflation.

Finsum: Charles Schwab sees positive returns for fixed income in 2024 due to slower economic growth and falling inflation. However, it expects volatility to continue given uncertainty over the Fed.