REIT retreat

07/29/22
  • REITs have underperformed the broad market this year
  • SUI up 8% since mid-June after 28% correction
  • Stock found support after testing 2020–2021 price consolidation

This year has challenged traders and investors on many levels. Few people last December were predicting a bear market, for example, and while many highlighted the inflation threat, how many would have guessed that one of the sectors traditionally associated with relative strength during inflationary periods—Real Estate Investment Trusts (REITs)—would have fared so poorly so far this year?

But many of them have. As of Thursday, the S&P 500 REIT industry group was down around 15%, a little more than the S&P itself. And despite rallying more than 6% over the past month or so, it’s still down more than 10% over the past three months, toward the bottom of the S&P industry pile during that stretch. For example, Sun Communities (SUI) is down roughly 22% this year after gaining 38% in 2021:

Chart 1: 1. Sun Communities (SUI), 2/24/20–7/28/22 (weekly). Sun Communities (SUI) weekly price chart. Found support near top of prior consolidation.

Source: Power E*TRADE. (For illustrative purposes. Not a recommendation.)


One of the reasons REITS are supposed to fare well during inflation is that they can increase rents and pass that income on to investors.1 But reality often diverges from theory. Because they are largely priced as yield assets, REITS have also suffered from this year’s rising interest rates, as well as the larger stock downtrend that has impacted almost all corners of the market.

Whether REITs will continue to struggle is another story. But what may interest traders, and some investors, is whether areas of the market and individual stocks that have fallen out of favor may be worth a second look because of their price action.

SUI, for example, began to stabilize as the stock tested the top of the extended consolidation that lasted from June 2020–April 2021, which also happened to be the 50% retracement level of the stock’s rally off its March 2020 low. (Also, in late June Morgan Stanley & Co. research cited the potential advantages of incorporating REITs in a portfolio.2)

Broader market conditions will likely play a role in determining whether the stock can hold support, but traders often pay closer attention when an invidual stock or sector approaches a significant price level.

Today’s numbers include (all times ET): Personal Income and Outlays (8:30 a.m.), Personal Consumption Expenditures (PCE) Price Index (8:30 a.m.), Chicago PMI (9:45 a.m.) Consumer Sentiment (10:00 a.m.),

Today’s earnings include: Colgate-Palmolive (CL), AbbVie (ABBV), Aon (AON), Chevron (CVX), Exxon Mobil (XOM), Phillips 66 (PSX), Procter & Gamble (PG).

 

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1 CNBC.com. Case-Shiller Home Price Index and FHFA House Price Index. 7/26/22.
2 Morgan Stanley (Investment Management). Why REITs? And Why Now? 6/29/22.

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