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Market Sell-Offs Don’t Automatically Mean Downturns
About a week ago, the decline in the stock market generated its share of “sky-is-falling” headlines. “Dow tumbles 1,000 points, S&P 500 posts worst day since 2022 in global market sell-off,” noted CNBC. “Dow sinks more than 1,000 points in global market sell-off,” noted the Washington Post, adding that fears of a slowing U.S. economy generated the action.
Then there was U.S. News Money’s question, “Will the Stock Market Crash in 2024?”
Yet, less than a week later, things seem to be reversing. Specifically, following the release of consumer price index data , which showed an annual increase in inflation of 2.9%, the stock markets seemed to be perking up. And according to Kevin Thorpe, all of this explains that “although the stock market is obviously important, it isn’t always the best predictor for the economy – or the property sector.”
Digging into the Reality
In 1966, MIT economist Paul Samuelson famously quipped that the stock market had “predicted nine of the past five recessions.” Close to 60 years later, Thorpe, who is Cushman & Wakefield’s Chief Economist, acknowledged that an apparent slowdown in the U.S. economy—partly due to a weaker-than-expected July job report—was one reason behind the selloff panic.
But in a recent “Behind the Numbers” presentation, Thorpe explained that “from a commercial real estate perspective, the economy is doing what we thought it would do. The market was way oversubscribed to the notion that we were going to skirt through this period of restrictive policy without seeing weaknesses percolating through the labor markets.”
While that would have been great, that belief is unrealistic.
“We really needed the economy and labor markets to slow. Not to crash, but to slow,” Thorpe commented. All of this is happening, he said. Even the market sell-offs from record highs can be desirable, as it reduces the wealth effect. This, in turn, can cut spending. Less spending means lower prices and reduced inflation – giving the Federal Reserve the confidence to start cutting the Effective Federal Fund Rate (EFFR).
What it Means for CRE
Thorpe explained that cutting the EFFR is essential for a stronger commercial real estate recovery, especially in the capital markets. The decline in the federal fund rate would eventually trickle down to lending rates, potentially lowering the overall cost of capital and spurring investment and development.
However, Thorpe cautioned that an economic slowdown won’t be comfortable. “It will get increasingly uncomfortable in the coming months, but it’s necessary,” he explained. “Assuming we avoid a recession, this really should be interpreted as a positive for commercial real estate because the path to cutting (interest) rates is now far more visible.”
- ◦Financing
- ◦Economy
- ◦Policy/Gov't
