Capital market pundits say that the 600-point-plus stock market correction has been a long time coming, and that some of the exuberance was not justified. It’s been the worst week for the stock market since February 2016. This expected volatility illustrates how important it is to maintain a diverse portfolio of investments, including real estate.
Let’s look at some long-term trends impacting publicly traded companies. The 7-year and 10-year CAPE (Cyclically Adjusted Price-to-Earnings Ratio) is 100 percent above the historical 100-year-plus average. So, unless something fundamentally changes, such as valuations or an acceleration in per share growth, there will be some reversion to a place near the mean or at some new delta above the mean.
Economic growth at near full employment must come from productivity gains, which have been scant in the recent past. Most of the quantum changes in technology and automation have been largely played out, and we will need a disruption involving AI to change this. Machines will have to do a lot more of the work to bolster productivity, and this is some distance away.
The fickle emotional component that fuels the exuberant mood of investing is also impacting the capital markets. One thing is certain: Investors should be diversified to protect themselves from such giant swings. The individuals who will be hit hardest are investors who entered the market recently, older baby boomers and retirees.
How Investors Can Hedge Against Rising Interest Rates
With interest rates projected to increase throughout 2018, there’s no better time to invest in real estate and take advantage of the arbitrage between property yields on the and interest rates. While the fundamentals of investment real estate remain strong, prices are rising and rents are going up in most major markets nationwide. An investor’s entry point into the market will impact their total returns. If an investor prefers immediate cash flow month-over-month, they should enter the real estate investment market now. If an investor seeks appreciation, now is still the time to enter the market because they can capitalize on a rising price curve to maximize their gains. Finally, if an investor seeks relief from volatility that is driving up the sales of Tums, then residential real estate may be the medicine.