US equity markets face turbulence amid rising interest rates and soft earnings

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US equity markets face turbulence amid rising interest rates and soft earnings
Credit: © Reuters.

Last week saw significant declines in U.S. equity markets, primarily driven by the potential for additional Federal Reserve rate hikes and disappointing corporate earnings results. The 10-Year Treasury Yield surged to its highest close since 2002, and the CBOE Volatility Index reached levels not seen since mid-March.

The Equity REIT Index and Mortgage REIT Index both experienced substantial declines due to rising interest rates. This surge in rates has had a major impact on homebuilders as higher mortgage rates have started to affect housing market data.

In the REIT sector, Equity LifeStyle (ELS) managed to stay in positive territory despite the overall market turbulence, while Prologis (NYSE: PLD ), Crown Castle (NYSE: CCI ), SL Green (SLG), VICI Properties (NYSE: VICI ), and Alpine Income (PINE) all reported declines. Blackstone (NYSE: BX ), a private equity firm, also saw a decline after reporting soft earnings results. Residential mREIT Orchid Island (ORC) faced pressure due to rising benchmark interest rates and downward pressure on MBS valuations. This was reflected in the decline of the iShares Mortgage Real Estate ETF (REM).

The rise in US 10-year bond yield by 30 basis points to 4.93% last week was influenced by Jerome Powell, the US Federal Reserve chairman's statements about robust economic activity complicating the Fed's decision to halt rate hikes. Powell confirmed that US interest rates are likely to remain high for a longer duration, leading investors to discard expectations of a near-term rate cut.

The upward trend in bond yields since August is attributed to investors' expectations about the path of short-term rates and a term premium for holding longer-term securities. Investors fear higher-than-expected rates due to the growing US budget deficit, which might force more bond issuance, thereby shifting the supply-demand balance.

Despite the rate hikes, the resilience of the US economy against higher interest rates is linked to a significant increase in household wealth by approximately $US43.4 trillion or 30% since 2020. The Fed’s Survey of Consumer Finances revealed that American families saw their wealth increase dramatically between 2019 and 2022 due to surging equity markets, rising house prices, and substantial government relief packages. This wealth surge has sustained spending and economic growth.

The Bloomberg US Bond Index continues to decline, producing total returns of -3.1% this year. Upcoming earnings reports from Dynex Capital (NYSE: DX ) and KKR Real Estate (KREF) will be closely watched by investors.

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