Multifamily Investing Trends | Real Estate Investor

By Christopher Levarek

"The years ahead will occasionally deliver major market declines -- even panics -- that will affect virtually all stocks. No one can tell you when these traumas will occur."

- Warren Buffett

In a recent Newsletter, we discussed recent events where the Federal Reserve injected cash(300 billion) into the Repo Market, a short-term market that provides financing for buying & selling bonds. This was a “necessary action” to keep interest rates at the rate desired by the Federal Reserve which normally sit down around the 2%-2.25% mark currently for this market. Due to lack of capital or funds for borrowing, interest rates rose to around 10% in the Repo Market. This same action was taken in 2007, preceding the recession of 2007-2008.

This is just one of the many indicators of a coming market correction. Today we would like to look at two additional indicators economists and businesses monitor to be aware of coming changes in the economy. Although these formulas or indicators are not always 100% accurate or able to predict the future, it is helpful to understand and utilize the data to make sound decisions at the right time in the cycle.

Market Indicator #1 : The Yield Curve

One of the more commonly known indicators of an impending recession, the “yield curve” corresponds to the monitoring the “yield”, or interest rates on Treasury bonds. With many variations of Treasury bonds, this yield curve, tracks the variation in changes in interest rates over a specific period for 3 month, 2 year and 10 year bonds.

In a normal growth cycle, interest rates for longer term bonds such as the 10 year bond are higher. This is because due to the high amount of variations in the market over 10 years, it takes higher interest rates to encourage an investor or owner of the bond to hold a bond for 10 years.

When the curve inverts, the interest rates on the 3 month or 2 year bonds become higher then the interest rates on 10 year bonds. This occurs as investors believe a recession is on the horizon, they prioritize longer maturities or bonds to ride out the upcoming market corrections. As the demand for short term bonds falls, interest rates rise to create demand on those short term bonds and we see a “Yield Curve Inversion”. This usually indicates a upcoming market correction, see graph below of previous recessions over time related to inverted yield curves(The inversion occurs at 0% as this is the spread between interest rates on long versus short term bonds).

Market Indicator #2: The Buffet Indicator

The Buffet Indicator as its known, credit to Warren Buffet, is simply the sum total of the market capitalization of all U.S. stocks relative to GDP or Gross Domestic Product. If stocks are overall trading higher then GDP, this indicates stocks are being bid up and at values inconsistent with the reasonable production of GDP or the economy. If stocks are trading lower then GDP, this indicates a buy opportunity or lower risk of market correction due to a strong GDP.

The Buffet Indicator typically follows the valuation, with regards to Total U.S. Market Value Relative to GDP:

If Value of this indicator is in the 70-80%, it is safe or good time to buy into stocks

If Value of this indicator is in the 100% area, be cautious and danger could be on the horizon.

If Value of this indicator is 130-140% or higher, extreme danger and impending market correction is almost certain.

See Chart below for moments in history where the Buffett Indicator “indicated” market corrections:

In Final

If you are wondering where we are at in the cycle relative to the above indicators, the yield curve inverted in August but currently rose slightly above 0% as of November 2019. The Buffett Indicator currently sits around 145.6% as of November 2019. Although no one has a crystal ball and can with 100% accuracy predict the future, being aware of where we are in the cycle allows for educated financial decisions to be made and better success across multiple avenues. Sign up for our Newsletter to be involved on updated real estate/market news and developments. As always, keep educating and Invest Smart!