Stock Market Outlook: July 2024

In this issue

• What's going on with commercial real estate?

• Fed decisions, blue chip earnings and more

Term of the month: Commercial real estate

If you Google the phrase “commercial real estate” right now, you’ll find a variety of foreboding headlines about the many problems in the U.S.’s nonresidential property market.

Commercial real estate is under a lot of pressure due to high interest rates and a persistent lack of commuter and retail traffic since the pandemic. What does it all mean for investors?

What is commercial real estate?

In its broadest definition, commercial real estate is any kind of real estate that isn’t an owner-occupied home; basically, real estate that can be leased out or sold for a profit.

There are several different subtypes of commercial real estate, including:

• Retail properties (such as storefronts).

• Hospitality properties (such as hotels).

• Office spaces.

• Industrial real estate (such as storage facilities).

• Special purpose properties (such as churches and movie theaters).

Commercial real estate may also include some residential or partially residential properties, such as mixed-use retail/apartment buildings, rental apartment buildings and low-income housing.

What’s going on in the commercial real estate market?

Real estate prices have a close relationship with interest rates, given that property owners frequently use debt such as mortgages or commercial real estate loans to buy property.

With that in mind, high interest rates have hit the commercial real estate sector hard. In aggregate, U.S. commercial real estate prices have fallen by more than 11% since the Federal Reserve started hiking interest rates in 2022, according to the International Monetary Fund.

What’s more, a lasting shift toward telework and e-commerce has hurt the perceived demand for properties like office spaces and storefronts, creating a situation where commercial property owners face difficulty filling up their properties as interest expenses rise.

More than $1 trillion in commercial real estate debt will come due by the end of 2025, and given the double-whammy of high interest expenses and weak demand, there are serious doubts about whether all of that debt will be repaid.

If the commercial real estate sector is hit by a significant number of defaults, there is some risk that the damage could spread to other parts of the financial system (such as banks that own real estate debt), as it did during the late-2000s housing market meltdown.

However, there are some reasons to be hopeful for a turnaround. The Federal Reserve is expected to cut interest rates at some point in 2024, which could take some pressure off the embattled commercial real estate sector in the form of lower interest expense.

9 best-performing commercial real estate investment trusts as of July 2024

Given the current state of the commercial real estate market, investors should think carefully about whether it’s a good idea to buy into it right now. Some speculators may be tempted to bet against commercial real estate at the moment, although that has risks of its own.

Whether you’re investing in commercial real estate or speculating on a downturn (via short positions or other bearish trades, such as put options), real estate investment trusts (REITs) are the main way in which investors can get exposure to this segment of the market.

And despite the headwinds facing commercial real estate, some REITs in this segment are still posting positive returns, at least for now.

Below is a list of the nine best-performing nonresidential REITs that trade on major U.S. exchanges, ordered by one-year performance.

Betting against commercial real estate

If you’re worried enough about the commercial real estate market to bet against it, there are several ways to do so. Some REITs can be sold short, and options traders may also be able to buy put options or sell covered calls on them in an effort to profit from a downturn.

However, these are risky maneuvers that may not be suitable for novice investors. Some brokerage accounts restrict short selling to investors who maintain a particular minimum balance, or they may require prospective options traders to fill out a questionnaire assessing their level of familiarity with options.

Even if you meet the requirements to short-sell REITs or bet against them with options, it’s a good idea to be cautious about such advanced techniques.

Dates that could move markets this month

Economic events

• Friday, July 5, U.S. Bureau of Labor Statistics monthly employment report. A report showing hiring levels and various measures of the unemployment rate.

• Thursday, July 11, BLS monthly consumer price index (CPI) report. A key inflation gauge. The employment and CPI reports could give investors hints about what the Federal Reserve will do with interest rates in future meetings; unexpectedly high unemployment or low inflation could indicate that a rate cut is on the way.

• Thursday, July 25, Bureau of Economic Analysis first estimate of U.S. GDP in Q2 2024. A measurement of whether the economy grew or contracted over the quarter.

• Friday, July 26, Michigan Consumer Survey preliminary data for July. The University of Michigan will release its final data for last month’s survey on July 12, and its preliminary data for this month’s survey on July 26. The survey has become a closely watched indicator of ordinary Americans’ perceptions of the economy, which have been improving recently after a long period of negativity.

• Wednesday, July 31, Federal Reserve interest rate decision. The Fed will conclude its monthly meeting and announce the new level of the federal funds rate, although it’s expected to leave it unchanged at the current range of 5.25% to 5.50%.

Earnings

Below is a table of blue-chip stocks that are reporting earnings per share (EPS) in July, with the dates and analyst estimates for their upcoming earnings reports, and the results of their previous earnings reports.

We’ve filtered the list for companies with a market capitalization of at least $250 billion. These are high-volume stocks whose earnings reports are often major trading events for options traders and day traders.

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