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Double bubble (part 1)

 In Blog, Newsletter

Issue No. 136

 

Assets Covered: Down Jones Real Estate Futures, Russel 2000 Index, S&P Mid Cap 400 Index

 

Talks for a second U.S. stimulus package are underway, with the main contention between the Republican and Democratic parties being how much to spend. A stimulus may soften the economic blow in the short term, however the economic fundamentals in two key industry sectors should raise eyebrows.

 

While the real estate market for single family homes is on fire due to low interest rates, multi-family and commercial real estate outlooks are not as optimistic.  Also a surge in Tech stocks since the beginning of June have helped the NASDAQ gain 7.8%. However, some investors caution that some tech stocks with high P/E ratios are overvalued, while others believe there is still strong growth in the sector.

 

In this two-part series we cover observations in the Real Estate and Tech industry sectors.

 

Real Estate Bubble

 

As we’ve covered before in our QuickHit series and in previous newsletters, small and medium sized businesses are taking the brunt of the economic hit from government shut-downs. According to the Small Business Association, they account for 44 percent of U.S. economic activity and create two-thirds of net new jobs. Small and mid-sized businesses are barely getting by, if they are not stamped out entirely.

 

The immediate impact of business closures can be seen in the commercial real estate sector. Since 2009, propelled by low interest rates and QE, commercial real estate loans have been on the rise. All the while buyer behavior was changing, as consumers started opting for online shopping over visiting a store. Lockdowns earlier this year accelerated the decline in retail resulting in what some call the Retail Apocalypse—with commercial real estate taking a big hit.

 

With retailers shuttering and small and medium businesses closing or cutting back, this contributes to record level unemployment in mostly low-wage jobs. With reduced or no income, tenants are struggling to pay their rent. This in-turn affects landlords’ ability to pay their banks. According to American banker, non-performing loans increased 4 times since the end of 2019.

 

Our forecast shows the Dow Jones Real Estate Futures in downward trend going into Q3. The data is also showing the Russel 2000 Index in a slow decline into Q4.

 

 

Dow Jones Real Estate Futures (JR1) forecast through September 2020
CI Futures generated this chart. Book a demo to see it in action.

 

 

 

Russel 2000 Index (RTY) Index forecast through September 2020
CI Futures generated this chart. Book a demo to see it in action.

 

 

Our forecast of the S&P Mid Cap 400 Index is showing stagnant growth. In February 2020, the index clocked in 2,036 points on average for the month. This was the highest monthly average of the end of day closing price so far this year. The data shows it is unlikely the index will rise above 1,800–on a monthly average basis–again in 2020.

 

 

S&P Mid Cap 400 Index (MID) forecast through September 2020
CI Futures generated this chart. Book a demo to see it in action.

 

 

It’s not all doom and gloom. Some see darkened retail stores re-emerging as E-commerce warehouses. We will have more on the Tech bubble in part two of this series coming out next week.

Western Technology Bubble - NASDAQ