Oil prices DOWN year to date
Oil prices spiked at the beginning of the year on the back of the war in Ukraine and have been a source of inflation this year. Combined with a lack of investment in the industry for the past several years, it seemed as if oil prices would stay elevated for a while. Other supportive factors have been OPEC's decision to cut production and the Biden administration's announcement to refill the Strategic Petroleum Reserve at $70/barrel. This week, the price of crude oil traded into the low $70’s/barrel, now down from the beginning of the year. We have written over the last few quarters about how markets seem to have shifted their focus from inflation to recession. Oil price action appears to be another indicator that we may be witnessing a slowdown, which would dampen demand for energy.
Non-traded REITs suffer outflows
Non-traded REITs, including the $69 billion Blackstone (BREIT) and the $14.6 billion Starwood (SREIT), reported redemptions that exceeded their monthly and/or quarterly limits. Real estate investment trusts (REITs) invest in real estate and must pass through 90% of their taxable income to their fund holders as dividends. Given their high dividends, they are generally used by investors as income-producing instruments. Over the last 4-5 years, non-traded REITs have become popular because they have low volatility and generally greater dividend yields. In the low-interest-rate environment, financial advisors and their clients have searched for ways to generate higher income. On the flip side, asset managers have gotten creative in how to distribute higher-yielding funds, and the “retail” channel exploded. As their description implies, compared to publicly traded REITs, which trade like stocks, non-traded REITs are not liquid. They allow for a small percentage of outflows monthly and quarterly, and if requests exceed those limits, they are put in a queue for the next window. It is unlikely that this situation will lead to any significant real-world fallout, but buyers of such products should be better informed on how they work. It is also worth noting both REITs above posted positive returns this year, while publicly-traded REITs are all down significantly.
Volatility in “safe” markets
Since late September, the US dollar index (which measures the value of the US Dollar versus a basket of other currencies) has come down ~8.5%. Until then, it had been up almost 20% on the year. Long-term US treasuries, as measured by the 20-yr treasury bond ETF (TLT), are up ~17% since late October, having been down as much as ~38% on the year before finding a bottom. The US treasury market and currencies like the US dollar are some of the largest and deepest markets in the world. This kind of volatility is more common in “riskier” assets like stocks but is not very common in these bigger “safer” markets. In our view, this speaks to an environment that continues to be very different than what we have experienced in the recent past, and investors need to be cognizant of how quickly markets are moving.