What does it say about us as people when markets celebrate news that more people are out of work? According to the US Department of Labor, the number of people claiming unemployment benefit rose to its highest since August 2023. The results could provide further evidence that the US labor market is softening.
It could even strengthen the case for the US Federal Reserve to start considering reducing interest rates sooner rather than later. Of course, it is not a given that rate cuts are imminent. But it could suggest that the Fed’s restrictive policies are having their desired effect.
The fact that high interest rates was always going to work was never in doubt. The only question was how long it would take. The Fed’s intention was always to carefully calibrate its monetary tightening to avoid shocking the market. Nobody wants a “Liz Truss” moment that shook London markets to the core.
So, where do we go from here? Any reduction in the cost of money will be a godsend to indebted businesses. Some companies naturally carry a lot of debt. That is how they can provide a return to shareholders. They might have low profitability and modest revenues compared to their assets. But they can still boost their return on shareholder equity through leverage.
A good example could be Real Estate Investment Trusts. They have been put on the back foot ever since central banks started to ratchet up interest rates and kept them higher for longer. But their fortunes could be about to take a turn for the better.
That said, not all REITs will benefit from lower rates in exactly the same way, especially if economic activity should slow. It is vital to pick our REITs with care. Those with prime assets in the right location, in the right sector, and have decent capitalisation rates could continue to generate strong distributable income to unit holders.
One reason why they were unloved by the market was not because they were doing badly. Some were able to maintain their distribution and, in some cases, raise their payout to unit holders. The reason why the market shunned them was probably because investors could get a higher and safer return from bonds.
But that could be about to change. Exactly when is anyone’s guess. However, investing is not about timing the market but time in the market.
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Disclosure: David Kuo does not own any of the shares mentioned.
