Stock market correction spurs portfolio re-calibration.
As the new coronavirus (COVID-19) broke free from China, the prospects of increased economic risks drove Wall Street into a flight to safety. Over the course of the following three weeks, the S&P 500 index fell 30 percent and pushed the 10-year Treasury to a record low, briefly touching 0.42 percent on March 9. Since bouncing from that intraday low, the Treasury rate has been on an upward trajectory. Market turbulence remains elevated, with the volatility index reaching its highest level on record, reiterating the comparative long-term stability of real estate investments.
Federal Reserve takes decisive action to sustain market liquidity.
To invigorate the economy during this period of uncertainty and proactively ensure capital markets do not lock up domestically or internationally, the Fed has taken swift action. On March 3, the Federal Reserve made an emergency 50-basis-point reduction to the overnight rate and later committed to more than $1 trillion of Treasury purchases and repurchase agreements. Following President Trump’s declaration of a national emergency on March 13, the Fed followed with an additional 100-basis-point cut and a commitment to $700 billion of quantitative easing. This takes the Fed funds rate back the 0-0.25 percent range, where it was through much of the Great Recession, keeping the interest rate climate low to fuel spending to support economic growth. While the Fed’s action has been so swift that it caught Wall Street by surprise, creating short-term volatility, it has also demonstrated the commitment to getting ahead of the biggest financial market risks.
Real estate investments deliver outsized longterm returns.
While the stock market delivered exceptional total returns in excess of 25 percent last year, the recent correction has demonstrated how much volatility risk goes with that yield. Comparably, real estate investments averaged a total return of 7 percent last year, but without the whipsaw repricing experienced by Wall Street. Comparing the two asset classes over the long term demonstrates the advantages of real estate. An investment made 20 years ago, at the beginning of the year 2000, has delivered dramatically different results. The average total return on commercial real estate over this time has topped 359 percent while the stock market has delivered a 115 percent return. Even without considering the recent stock market correction, real estate outperformed.
Wall Street downturn significant but moderate compared with past corrections.
Over the course of three weeks, the stock market fell by 30 percent with dramatic singleday moves both up and down. While the new coronavirus sparked the selloff , the stock market was particularly vulnerable to a correction. Over the course of 2019, the stock market valuation increased to a record level that was not substantiated by comparable earnings in the 12 months leading up to the virus outbreak. By comparison, the stock market fell by 56 percent during the financial crisis in 2007 and by 49 percent in the early 2000's as the dot-com bubble burst. Though this downturn is significant and has yet to fully play out, much of the current momentum is fear-driven. As additional information and clarity emerges, market dynamics should begin to stabilize.
-Marcus & Millichap
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