It’s all in the numbers

November 20, 2013 admin

“If the Dow rises or falls, that’s just telling you how American public companies are doing. A movement in the 10-year note, on the other hand, gives us insight into how every American is doing. And that’s the real economy, right there.”
— Paddy Hirsch, senior producer, Marketplace

On Nov. 18, the Dow Jones Industrial Average made history by toping 16,000 for the first time, although it closed the day below that number. It only took 136 trading days for the DJIA to achieve its sixth-fastest 1,000-point gain to reach the 16,000 milestone, according to The Wall Street Journal.

A historical chart of the DJIA shows closing prices for the Dow from 1900 to the current month. It’s quite a sight to behold because of the perspective it offers; the global financial crisis barely appears to make a dent in the DJIA’s upward trajectory spanning more than 100 years, and other cycles of stock market tumbles and resurgences are quite evident during this past century.

But while the 16,000 figure is impressive, especially in light of losses the stock market saw during the global financial crisis, it’s only indicative of how public companies and their shareholders are doing in corporate America and not the most important figure to watch in helping gauge the overall health of the U.S. economy, notes Paddy Hirsh in his Marketplace article, “Forget Dow 16,000. Here’s the number you should care about”.

Hirsh argues that we should instead be paying attention to the yield on the 10-year Treasury bond — which reached an eight-week high of 2.80 percent on Nov. 12 — because it gets at the heart of how most Americans are doing financially. As the 10-year T-note changes, most other economic numbers adjust, such as mortgage lending rates, credit card loans and corporate interest rates. And as the economy improves, so too does speculation that the Federal Reserve will begin tapering its quantitative easing bond repurchasing program.

But Janet Yellen, on track to succeed Ben Bernanke as Fed chair, said at her confirmation hearing testimony on Nov. 14 that it’s “important not to remove support, especially when the recovery is fragile.” Although progress is being made in such areas as the labor market, the Fed wishes to see more sustained growth and recovery before tapering begins, and still expects to maintain a “highly accommodative monetary policy for some time to come thereafter,” she stated. Such sentiment helped bring 10-year Treasury bond yields down to 2.69 percent on the day of Yellen’s testimony.

With Fed stimulus likely to continue for some time, 10-year Treasury note yields should continue to stay low (note that the long-term average 10-year Treasury yield is 6.57 percent, much higher than its current level).

But as the economy improves, interest rates will rise, which will greatly affect the CMBS market, notes Bill Small, a columnist with the Aspen Daily News, in his article, “What do rising interest rates mean to investors?”

Small says a large volume of CMBS will be maturing in 2015, 2016 and 2017, and it could be hard for investors to refinance their loans at higher interest rate levels, potentially resulting in lower property values in the commercial real estate market for the next two to four years.

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Jennifer-Molloy91x119Jennifer Molloy is editor of The Institutional Real Estate Letter – Asia Pacific.

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