The real estate space—at least parts of it—have been red-hot since COVID began. Residential real estate in particular has done well, as the fall in interest rates has sent mortgage issuance surging. One area of residential that you might want to stay away from, however, is apartments. Investors have been shying away from the sector. For instance, the FTSE Nareit Equity Apartments index is down 21% to-date. The big fall comes despite landlords saying rent collections are strong. The reason why seems to be the big rent reductions in coastal cities. Landlords in New York, San Francisco etc have had to drop rents by 15% or more to keep tenants and attract new ones, and that figure doesn’t even price-in other incentives, like months of free rent.
FINSUM: Our view here is that COVID will likely lower demand for urban apartments, since the pandemic highlighted some of the weaknesses of densely populated buildings. However, occupancy overall seems likely to stay strong.
While it has not been nearly as tumultuous as the first time around, the DOL 2.0 rule-making and approval process has already been rocky. There was a great deal of upsettedness over the short comment period. So much so that the DOL reversed course and offered a public hearing to gather more opinions. That was held this week. However, the DOL says no further public hearings or comment period will be extended (despite previously mentioning this possibility). Accordingly, it is looking very much like a rule will be brought forth ahead of the election, significantly in advance of where the timeline looked to be even a few weeks ago.
FINSUM: The DOL is really pushing the pace here. It seems like this might get on the books before the election, but it would still be quite easy for Biden to undo if he takes office.
Despite the volatility of the last couple of days, the markets actually got some good economic news today. As usual, the data is not perfect, but directionally, the unemployment numbers suggest the underlying economy is improving. The unemployment rate in August was 8.4%. That marks the first reading under 10% since before the pandemic. The economy added 1.4m jobs overall. The only fly in the ointment is that this is the third straight month that the number of jobs added has been falling, a sign that the recovery could be losing momentum.
FINSUM: The reality is we are not just going to immediately pop back to January 2020’s economy. The fact that well over a million jobs were added in a very tumultuous month is a good indication that the recovery is on track.
The muni market is doing great, at least on paper that is. Muni bonds have seen an absolutely furious rally over the last few months, which has driven yields to the lowest level since the 1950s. However, many municipalities have huge budget deficits, so the trick is to buy prudently. Eaton Vance published a piece with a state by state analysis of financial health, since the pain of tax revenue losses is not spread evenly. There are multiple ways to look at the info. The states who will see a 20%+ fall in revenue include: Idaho, Wyoming, North Dakota, Oklahoma, Missouri, New York, Alaska, Maine, West Virginia, Louisiana, and New Jersey. The top ten states for creditworthiness (meaning the most creditworthy) according to Eaton Vance are Idaho, Wyoming, South Dakota, Utah, Nebraska, North Dakota, Tennessee, Iowa, Virginia, and Minnesota.
FINSUM: New York and New Jersey are the most alarming ones on this list, since they are seeing big revenue falls and were already in quite poor financial condition. Illinois is obviously troubling too, as it is dead last in creditworthiness and likely to see a 13%+ fall in revenue.
Picking stocks is about the hardest thing one can do right now. The market has risen so much—and seems to be defying gravity—that it is hard to know where to allocate money. On the one hand, growth stocks look ludicrously priced, while on the other, value has been underperforming for over a decade. With that said, here are some stocks that are still providing a good discount but look likely to rise as the performance of their underlying business improves. The first place to look is at beaten-up financial stocks, such as those in the KBW bank index, which is down 30% for the year despite big gains in the market. However, sentiment is turning positive. According to RBC, “Based upon the valuations and the outlook for the economy in 2021, we believe bank stocks can be purchased with the expectation the group outperforms the general market over the next 12-18 months”. The stocks to look for are Bank of America, Truist, TCF Financial, Western Alliance, BankUnited, and Investors Bancorp.
FINSUM: Banks are always a bet on the economy, and given their heavily maligned share prices and the general trajectory of the recovery, seem a wise bet. The only lingering risk in our minds (other than a weak recovery) is how continued ultra-low rates might hurt their earnings over the long haul.