March Market Update

For the better part of a year, we’ve been in an anxious game of “watch and see” for recession as the steady drip of unfortunate events tested the precarious surface tension on our collective bubble. If you’ve been waiting for the other shoe to drop, it came crashing down over the weekend with the collapse of Silicon Valley Bank. Signature Bank followed suit shortly thereafter.

It is safe to say that the world is on edge about potential impacts to the economy. Many are wondering if this past week’s events will tip the US economy into recession and are speculating whether the Federal Reserve will raise interest rates this month, and if so, by how much. Time will give us answers. In the meantime, Blooma is taking a look at some performance indicators outside of the banking whirlwind:

Bracing for impact

The labor market has shown resilience and the stock market bleeding has cauterized. Inflation is under control, but interest rate increases could manifest if prices don’t start to come down. While we have seemingly avoided a recession, we are still flanking a narrow trail with jagged edges on the cliffside. Corporate profit growth has come to a halt and leading indicators of housing prices demonstrate a market primed for contraction. While commercial real estate loan balances are in growth territory and corporate balance sheets are very healthy, consumer confidence is waning, and the slightest misstep could send the global economy spiraling into recession. Escalation in the Russo-Ukrainian War, an overly aggressive rate hike, or failure to avoid a bank run would be the slip off the proverbial cliff.

Business balance sheets remain healthy

Business balance sheets are still in extremely good condition. On aggregate, close to the best in 30-years. This ameliorates much concern for a corporate debt crisis; however profit growth is beginning to stagnate and declining consumer confidence could cause debt expansion through the remainder of the year.

Stagnating profits pose risks to stocks

While the price-to-earnings ratio has come back to reality, public equity markets could still be in trouble after the 2022 bludgeoning. If corporate profits begin to compress, 2023 will be a year with no price growth or price contraction. The avoidance of World War III and an expansion of consumer confidence would result in a positive year for US, and global, equity.

Challenging years for the consumer

The past two years have been hard on the American consumer.

Despite a decent labor market, the out-of-control inflation has caused Americans to reduce savings drastically to afford every day non-durable necessities. This has also caused consumer confidence to falter. A decline in prices would be a huge upside lift to households and the broader economy at large.

CRE loan balances still going strong

Notwithstanding office space, commercial real estate loan growth has been very strong in comparison to other loan types and asset classes. Multifamily activity has given much of this upside lift, but a potential downwards spiral in office space could buck this trend.

Housing prices have room to fall

Mortgage originations are now lower than they were pre-pandemic and pricing hasn’t fully corrected to the new rate environment. The decline in home prices will bode negatively for the economy as a degradation in felt household net-worth will weigh further on the already shaky consumer confidence. Likewise, even with prices continuing to decline there likely won’t be an all out crash as single-family supply is still very limited.

ABOUT THE AUTHOR

Eric Tannenbaum, CFE

Eric is a Sales Director at Blooma where he helps originators, underwriters, and portfolio managers transform their CRE deal due diligence processes. Eric has a decade in financial services experience with most of his career spent at Moody’s Analytics where he was an associate economist and relationship management professional for financial services industry solutions. He holds his Bachelor of Arts with a dual-major in Economics and Biology from Bucknell University, a Master of Science in Economics from Lehigh University, and an MBA with concentrations in finance and analytics from Villanova University.