The Pulse – What’s happening in the Economy and the Capital Markets: 12/14/20 – 12/18/20


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The Pulse – What’s happening in the Economy and the Capital Markets: 12/14/20 – 12/18/20

Executive Summary

Markets continue to increase reflecting significant optimism, while the economic data continues to include mixed results. This week’s focus is Commercial Real Estate, highlighting the weakened construction forecast and investor concerns in spite of the pre-COVID-19 cap rates.

The Markets

While many countries, states and municipalities take steps to shut down activity to mitigate a resurgence over the holiday season, excitement remains strong following the rollout of the COVID-19 vaccine.

The Pulse 12.21.2020 Market chart

The market experienced significant highs and lows coupling the anticipation of an approved stimulus deal with news of one of the largest, most pernicious computer hacks affecting 18,000 companies and government departments.

The Russell 2000 (smaller, more cyclical, domestically-focused companies) outperformed expectations. The technology-focused Nasdaq (secular growth companies and a place to “hideout” for investors concerned about the economy) also performed well.

  • Other “risk-on” markets, such as Emerging Markets and High Yield bonds, did not rally much.
  • Month to date, the “risk-on” assets of the Russell 2000 and the prices of oil have been the best performing assets tracked on a weekly basis, having increased 8.3%.

Dealmakers are rushing to announce or close deals before year-end and ahead of the Georgia January run-off election.

  • Over the weekend, it was leaked that Global Payments ($60 billion market cap) and Fidelity National Information Services ($90 billion market cap) were in late-stage negotiations on a $70 billion merger before the deal fell apart.

2021 could be a big year for mergers & acquisitions as rates remain low and companies seek to consummate deals before any potential tax and regulatory changes are passed by the new administration.

  • The technology and financial services are two prime industries for consolidation with sizable scale potential across software development and IT investments during the expected economic upswing.

The Economic News

The high frequency data shows modest improvements in a few categories compared to last week (e.g. staffing index, gasoline demand, air travel), yet the weakened consumer and stronger industrials continue to be the dominant trends.

  • Continuing jobless claims have declined (good news) though initial claims are still high and trending in the wrong direction.
  • Consumer data for lodging and dining are weak while travel data around air passengers and gasoline demand improved.

The Pulse 12.21.2020 High Frequency Data Chart

We received additional government data highlighting the current trend of stronger Industrial economy performance while the Consumer economy is tepid and weakening.

Leading Indicators Index reported positive, slightly better than expectations and below October:

  • Growth in building permits was greatest contributor to the improvements October.
  • Stock market increases were the 2nd strongest contributor.
  • Greatest detractor remains the elevated Jobless claims.

Government data reflected the strong state of the manufacturing economy:

  • Industrial Production was better than expected growing 0.4% from October.
    • A slowed pace growth compared to October over September
  • Capacity Utilization was 73.3%, better than expected and higher than November.
    • Capacity Utilization still has 3.7 percentage points to return to pre-COVID-19 levels
  • Manufacturing PMI was better than expected and in line with November
    • Services PMI was below expectations and down from November as COVID-19 impacts services business


  • Housing Stats were above expectations and higher than October.
  • Building Permits (a leading indicator) were much better than expected and +6% from October.

Leading Economic Indicators: Building Permits

Building Permits chart

Focus of the Week – Commercial Real Estate

The Architectural Billings Index (a leading indicator for commercial real estate construction) November release revealed that while the index has moved up significantly, November regressed compared to prior months.

  • A reading below 50 is a sign that architects see billings likely to decline over next 9-12 months.

Architecture Billings Index chart

A key trend popped up among Office and Multi-Family asset classes when tracking Commercial Real Estate in Commercial Mortgage-Backed Securities (“CMBS”) on a monthly basis. These two popular classes could be directly impacted by COVID-19 impacted trends.

According to Bloomberg CMBS data, cap rates for Office and Multi-Family are now roughly in line with early 2020 pre-COVID-19 rates.
• However, when comparing the cap rate to the ten-year Treasury (which is typically considered the “risk-free” alternative investment), the difference, or “spread,” has increased.
• This increase is caused by interest rates on 10 Year government bonds having declined significantly.
• A higher spread = markets seeing more risk in the asset.
• If interest rates were to increase quickly and the spreads stayed consistent, cap rates would increase.


Office - Cap Rate & Spread - National Chart

Source: Bloomberg


Multi-Family - Cap Rate & Spread - National Chart

Source: Bloomberg

A Few Stories that Caught My Eye


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