3 Market Predictions For November

Despite October's equity rally and a 25bps Fed rate cut, the author predicts three significant market developments for November. First, another credit event, or 'cockroach,' is anticipated, likely stemming from commercial real estate given elevated CMBS delinquency rates in office and multifamily sectors, or potentially from private equity and highly leveraged companies, as a consequence of post-COVID monetary stimulus and subsequent rate hikes. Second, job growth is expected to turn negative, evidenced by recent downward revisions, ADP data, and major corporate layoffs, which could pressure the Federal Reserve to further lower rates. Third, average rents are projected to continue falling due to a surge in apartment construction and a significant outflow of migrants, which, while negative for landlords and REITs, is seen as a positive disinflationary force, particularly for Owner's Equivalent Rent (OER) within CPI.

Analysis

The article outlines three significant market predictions for November, indicating a pessimistic near-term outlook despite October's equity rally. A key concern is the anticipated emergence of another credit event, or 'cockroach,' following recent bankruptcies and major bank write-offs by UBS, JPMorgan Chase, and Jefferies. Commercial real estate (CRE) is identified as a primary vulnerability, with CMBS delinquency rates for office properties surpassing Great Financial Crisis peaks and multifamily rates doubling to over 6.5% in the past year, reflecting the delayed consequences of post-COVID monetary stimulus and subsequent aggressive tightening.

Furthermore, the analysis projects negative job growth for November, citing downward revisions to summer figures (averaging under 30,000 positions monthly from June to August) and recent corporate layoffs by Amazon and UPS. This weakening employment picture, if realized, could exert pressure on the Federal Reserve to consider more aggressive rate cuts in the coming quarters.

Finally, average rents are expected to continue their decline, driven by a surge in apartment construction (nearly 600,000 units in 2024) and a significant outflow of migrants. While this trend poses challenges for landlords and residential REITs like AvalonBay and Camden Property Trust, it is viewed as a positive disinflationary force, particularly for Owner's Equivalent Rent (OER), which heavily influences CPI.

Key Decisions for Investors

• Investors should increase scrutiny on commercial real estate debt and related exposures, particularly in office and multifamily CMBS, given elevated delinquency rates and potential for further credit events.
• Closely monitor upcoming labor market reports for confirmation of negative job growth, as this could accelerate Federal Reserve rate cut expectations and impact economic forecasts.
• Re-evaluate positions in residential REITs and other rental market-exposed assets, considering the projected continued decline in average rents, while acknowledging its positive implications for inflation moderation.