Since October 2022, the stock market has steadily climbed higher and is now up over 20% from those lows. This begs the question of whether we are now in a new Bull market. Let’s explore along with concerns about commercial real estate.
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Persistent Negativity Despite Upward Stock Market Movement
Negativity surrounding the economy and the markets has been persistent. Inflation, fear of recession, Fed rate hikes, and the constant droning of political pundits from the 24-hour cable news channels have given most investors a good case of “The Blues”.
I would suggest that if you polled the average person on the street about the stock market, the vast majority would be surprised to know that the S&P500 is up over 20% since the bottom in October 2022. For the past eight months, the stock market has moved higher against a backdrop of all these concerns.
The old adage that the market “climbs a wall of worry” seems to be holding true. This begs the question, “Are we now in a new bull market?”
The Likelihood of a New Bull Market
A 20% move off the bottom has often signaled the start of much larger up moves. According to Birinyi & Associates, it took the S&P500 239 days to get to the 20% level, the longest period of the previous 11 bull markets.
The slow nature of the recovery may be one reason investors feel worn out. Birinyi’s data shows that, of these past 11 bull markets, the shortest one lasted 491 days (in 1998) and the longest began on March 9, 2009, and ran for 3,985 days.
If the past is prologue, we may still enjoy higher prices. While price action is vindicating the Bulls, there are plenty of factors that the Bears are all too happy to mention.
What About the Fed and Inflation?
First is the Fed. Inflation is not vanquished and rates may still be heading higher at worst or at best, remain where they are for longer. The CPI and PPI figures will be released on June 13 and 14, respectively. We should know a lot more about inflation and the Fed then.
What About a Recession and Lower Corporate Profits?
The next concern is the possibility of a recession and, in turn, lower corporate profits. In about a month’s time, companies will start to report on 2Q23 earnings and guidance for the rest of the year.
What About the High Price of the Market?
The Bears also observe that the market is not cheap, trading for just over 19x current year earnings. Markets discount future news, so stocks might be saying inflation is coming down and profits will stabilize and exceed expectations.
Looking again at Birinyi’s data, the current P/E ratio is toward the higher end of bull markets at the 20% rebound level. However, the range is large with a low of 7.6x for the 1982 bull market and a high of 26x for the 1998 bull market.
The Bull and the Bears
P/Es do matter. As stated above, the 1998 bull market was the shortest of the last 11 bull runs. The longest bull market, at the 20% up mark, traded at just 12x earnings. If we are in a bull market, a portion of future upside is already priced in and this bull market perhaps could last less than many.
In any case, as typical, the Bulls will be dragging the Bears kicking and screaming to higher highs.
Commercial Real Estate Concerns
Commercial real estate (CRE) is a significant concern that hangs over the markets as a whole and especially over financial companies.
While CRE is often mentioned as a distinct asset class, it represents many different types of real estate, all with different characteristics and different economics. CRE might be hotels, warehouses, medical facilities, factories, or office space.
Commercial Real Estate Office Space
The last category is, right now, the most concerning given the new post-COVID “work from anywhere” trends. Even within categories, there are important distinctions. For example, office buildings might be “Class A, B, or C”. These buildings could be located in large-city downtown areas or in the suburbs.
While it seems apparent that investors should consider these differences, the markets, typically in the beginning, will treat it all as one and likely punish companies that own these properties or lend with these assets as collateral.
Opportunities will develop after these firms drop in price and then savvy investors can look at the details and make significant money. Banks, insurance companies, REITs, BDCs, private equity companies, real estate mutual funds, and bonds funds all own some CRE in some form or another.
Investors will need to carefully look at the details in these entities’ financial statements to see what type of CRE is owned and in what form. If there is a crisis in CRE (a lot will depend on the economy’s health) it will likely play out over several years.
CRE and Residential Real Estate Are Not the Same
CRE is not like residential real estate in 2007.
There are a variety of transactions that will happen relating to CRE that were not available to residential real estate. Workouts, capital injections, property swaps, and easier foreclosures are all actions that can not be done with houses. If there is a CRE crisis, we are in the early innings and it could develop and resolve in many ways.
Bull Markets and Commercial Real Estate Opportunities
What are your thoughts about being in a new Bull market? Is it likely?
What about commercial real estate? Which categories do you think are strongest?
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Note: This blog article is intended for general informational purposes only. Nothing in it should be construed as, and may not be used in connection with, an offer to sell, or a solicitation of an offer to buy or hold, an interest in any security or investment product. Investing involves risk.
Image credit: Study of a Bull, Jacques Raymond Brascassat, 1830 – 1867; oil on canvas, h 42.9cm × w 52.4cm × t 2.5cm × d 9.2cm, Rijksmuseum