January 8, 2019

I don’t know who penned Fed Chairman Jerome Powell’s commentary during the panel session in Atlanta at the American Economic Association’s annual meeting with Ben Bernanke and Janet Yellen, but leave no doubt, he literally read right off a script. When watching the three most recent Fed Chairs sharing the stage, Mr. Powell was sporting his reading glasses and wasn’t the only one working off of notes – very well-prepared notes. This session was supposed to be a “casual get together” of the three bankers – to congratulate each other and celebrate the great job the Fed has done since the 2008 Great Recession.

The “casual confab” quickly turned into a discourse by Powell, who expressed a reformed position by himself and his colleagues that laid out a much more accommodative and “flexible” course of policy-making going forward – willing to make ‘quick adjustments’ if necessary. Again, he read this statement word-for-word, making sure it came out exactly as it had been scripted, knowing the market now trades substantially higher or lower off of key words and phrases. Yellen and Bernanke were quick to offer supportive follow-on comments that collectively fueled the market higher into Friday’s closing bell.

Upon further questioning about how the markets have moved in big waves – with Treasury yields down a quarter-point and Fed Fund futures pointing to no rate hikes in 2019, and possibly rate cuts, and whether the markets are telling Powell he made a mistake – Powell replied saying, “I think the markets are pricing in downside risk, and are obviously well ahead of the data,” citing Friday’s strong jobs data.

But is the market “pricing in downside risk well ahead of the data”? That was a pretty bold statement, considering the latest round of manufacturing data released in both the U.S. and China. The China Caixin PMI, at 49.4, was downright ugly and the December U.S. ISM Manufacturing, at 54.1, was down sharply from 62.1 in November, missing all estimates, with new orders plunging by the most in nearly five years.

Just to be clear, labor market data is backward-looking and manufacturing data is forward-looking. And Apple’s earnings grenade only verified what FedEx and Ford had already made clear – the pace of factory output at the two largest economies in the world is slowing at a faster pace than all the experts predicted.

The dismal ISM report came the same day as the profit warning from Apple. Thankfully, the combination of the strong jobs numbers and the Powell statement gave an oversold market a catalyst from which to trade higher, with high-volume conviction. But before we break out the party hats, Mr. Market has a lot of technical wood to chop before any notion of a resumption of sustainable upside bias has been restored.

From the chart below, both the 20-day and 50-day moving averages have crossed down below the 200-day moving average for the S&P 500, and they made that crossing in a pronounced fashion.

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

The S&P closed Friday right up against its first test of resistance – the 20-day-ma. If cleared, this will open the way for the index to trade up to 2,645 (its 50-day ma), where stiff overhead resistance lies.

The first level is very achievable, just on the adrenaline from Friday’s bullish close, which was fueled by widespread short-covering, but in order to retake the 200-day ma at 2,740, investors are going to need a comprehensive trade deal with China, coupled with banner fourth-quarter earnings reports with better-than-expected forward guidance. The Fed has already done its part to restore credibility, and now it’s really up to the Trump trade team and corporations to provide the second wind for market bulls.

It should be noted that portions of the yield curve are threatening to invert. In fact, the 1-year and 2-year Notes briefly inverted, as did the 3-month and 5-year notes last Thursday. To keep the bears at bay, a flat yield curve can be tolerated, but an inverted curve sends the wrong message, even for a short time.

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

REITS Look Attractive for Income

Any time the SPDR Dow Jones REIT ETF (RWR) trades down to a level that pays a current dividend yield of 5.0%, I start to get very interested. As of last Friday’s close at $85.19, the yield was 5.06%. The 52-week high is $98.11 and its all-time high was $104, set back in June 2016. Since late 2014, shares of RWR have traded in a rough range of $85-$95, while its fundamentals have only grown more substantial.

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

The idea of owning a basket of brick-and-mortar REITs weighted at the top in mixed use, self-storage, data centers, and healthcare facilities has in my view great appeal right now. There is little if any dollar-currency risk – since the Fed just gave the bond market the all-clear sign – and these REITs’ businesses are domestic-focused and have a strong history of raising dividends.

While utilities are often seen as the go-to safe haven sector for equity investing during periods of economic slowing, domestic REITs offer a higher blend of yields. Unlike utilities, they are not heavily regulated. Unlike real land, they allow investors to buy into premier real estate with the click of a mouse.

I believe the REIT sector will outperform in 2019, and I’m not alone. Bond king Jeff Gundlach and his firm DoubleLine Capital launched the DoubleLine Colony Real Estate and Income Fund (DBRIX) on December 17, 2018. It will be the firm’s first income fund that diversifies away from its bond strategies.

So, whether buying REITs in the form of an ETF, mutual fund, or individual stocks, the case for commercial property based in the U.S. during times when P/E multiples are contracting from uncertainty surrounding global growth remains sound. A portfolio with some domestic REIT exposure to those sub-sectors might be for some income investors a nice way to sail through the choppy seas with an extra-large keel that provides an extra-large dose of price stability and dividend income.

About The Author

Bryan Perry

Bryan Perry
SENIOR DIRECTOR

Bryan Perry is a Senior Director with Navellier Private Client Group, advising and facilitating high net worth investors in the pursuit of their financial goals.

Bryan’s financial services career spanning the past three decades includes over 20 years of wealth management experience with Wall Street firms that include Bear Stearns, Lehman Brothers and Paine Webber, working with both retail and institutional clients. Bryan earned a B.A. in Political Science from Virginia Polytechnic Institute & State University and currently holds a Series 65 license.

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