A recap of the past week in 3 short headlines.
1. Recovering Slightly
The U.S. stock indexes experienced a stumble early in the week, but recovered to post modest gains of around 1% due to generally strong earnings results from the biggest technology companies. The calmness of the stock market throughout April resulted in a sharp pullback in the Cboe Volatility Index, which ended the month at its lowest level since November 2021. However, U.S. economic growth slowed significantly from the previous quarter and fell short of most economists’ forecasts, amid still-high inflation. Earnings for S&P 500 companies exceeded net income expectations, with 79% beating analysts’ expectations. Inflation continued to moderate with the Personal Consumption Expenditures Price Index rising at a 4.2% annual rate in March, down from a 5.1% increase in February. The U.S. Federal Reserve is expected to lift its key benchmark interest rates by a quarter of a percentage point to a range of 5.00% to 5.25% at its next meeting. The price of U.S. crude oil also experienced a pullback, falling below $77 on Friday.
2. What’s Going On With FRC
First Republic Bank (FRC) is facing the threat of collapse due to a significant deposit outflow in the first quarter of 2023. The bank lost over $100 billion in deposits, 40% of the total, and would have lost over 50% if not for a $30 billion injection of uninsured deposits from 11 of the nation’s biggest banks in March. Shares of FRC fell almost 50% in a single day and are down another 30% today. The bank’s market capitalization fell below $1 billion, a small fraction of its $40 billion peak in November 2021. The stock’s volatility prompted the New York Stock Exchange (NYSE) to halt trading of FRC 12 times in a single day. Moreover, if a private rescue deal isn’t reached soon, First Republic faces the possibility of losing access to the Fed’s lending facilities. Management is scrambling to convince regulators and executives of bigger banks to provide one more financial lifeline. First Republic Bank ran into financial difficulty shortly after the collapse of Silicon Valley Bank (SVB) and Signature Bank in March. The bank had the third-highest share of uninsured deposits that exceeded the FDIC’s $250,000 limit.
3. Elon Musk on Real Estate
In a recent Fox News interview with Tucker Carlson, Tesla CEO Elon Musk warned about the potential downfall of commercial real estate, which could have serious consequences and even lead to bank failures. The work-from-home trend has substantially reduced the use of office buildings around the world, causing record vacancies of commercial real estate in almost all cities. Musk explained that commercial real estate used to be considered the highest security and the safest assets for banks, but now, it’s not the case anymore. One company after another is canceling or not renewing their leases, and if they go bankrupt, there’s nothing for the bank who owns that real estate to go after.
Real estate industry veteran Benjamin Miller, co-founder and CEO of real estate crowdfunding platform Fundrise, also predicts impending financial turbulence, which could arrive this summer or early fall. He explained that the U.S. has enjoyed a long period of near-zero interest rates and a record amount of quantitative easing. And now that the Federal Reserve has started tightening, the outlook is bleak for an economy that relies heavily on borrowing. However, Miller sees opportunity ahead for investors who can afford it, as these signals indicate that we are nearing the bottom and portend the arrival of what could potentially become an extremely favorable period for new investments.
Benzinga real estate expert Kevin Vandenboss says if banks are ready to pull back on commercial real estate lending, private lenders like Blackstone Inc. and Apollo Global Management Inc. could see their business flourish. Real estate funds with capital to deploy would be able to take advantage of the situation by snapping up high-quality assets on the cheap. However, the challenge is identifying high-quality assets as the remote work trend continues, causing office buildings to face high vacancy rates. On the other hand, some real estate assets, such as multifamily properties, tend to be more resilient as people always need a place to live, making them worth watching.
U.S. stock indexes recovered slightly, with modest gains around 1%, due to strong earnings results from big tech companies, while U.S. economic growth slowed significantly and fell short of economists’ forecasts. Inflation continued to moderate, and the U.S. Federal Reserve is expected to raise its key benchmark interest rates by a quarter of a percentage point at its next meeting. First Republic Bank (FRC) is facing the threat of collapse due to significant deposit outflow, and management is scrambling to convince regulators and executives of bigger banks to provide a financial lifeline. Elon Musk warned about the potential downfall of commercial real estate due to the work-from-home trend, causing record vacancies and leading to bank failures. Real estate industry veterans predict impending financial turbulence, but also opportunity for investors who can afford it. Private lenders could see their business flourish if banks pull back on commercial real estate lending, while identifying high-quality assets remains a challenge.
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