When Blackrock’s Managing Director/Head of Thematic Strategy Kate Moore and Walker & Dunlop’s Chairman and CEO Willy Walker spoke during the Sept. 6, 2023, Walker Webcast, Moore’s view on the economy was optimistic compared to other experts.
Fast-forwarding nine months to June 5, 2024, Moore was the webcast guest, and her optimism was justified.
Moore recalled that the September webcast occurred at the end of what she dubbed a “rolling earnings recession across a bunch of different industries at different times.” Despite that, the data she and her team received indicated that corporate earnings were looking good. Meanwhile, “you go back to Q1 24, and the commentary on earnings releases and calls is very positive,” she noted. “Now the market is very much like, ‘okay, the coast is clear, we’re not going to have a recession, so we’ll see how this whole thing lands as it relates to rates and everything else.”
Is the Consumer Okay?
Moore said that Blackrock also continues to see health in the overall consumer income side. For one thing, household debt service payments as a percentage of disposable personal income are under 10%, well below the long-term average. The consumer debt ratio is also low relative to historical averages.
However, Moore acknowledged some cracks in the low-end consumer cohort, primarily due to inflationary pressures. Furthermore, low-end consumers are experiencing higher credit card balances. “They’re pulling back on things like travel, discretionary spending, and quick-service restaurants.”
On the other hand, the low-end consumer accounts for a smaller portion of overall spending. Moore explained that the middle and high-end consumers are doing reasonably well. “The top 40% of households by income contribute more than 60% of spending; they tend to be asset owners and have higher cash balances,” she said. As a result, even in an inflationary environment, there hasn’t been a significant decline in these households’ willingness to spend, Moore added.
Then, There are Interest Rates
The discussion on interest rates focused on Moore’s prediction of two cuts by the end of the year. The caveat is what the data says over the summer. Furthermore, the Federal Reserve needs consistent data trends before it’s likely to move on Effective Federal Fund Rate cuts. “It doesn’t do anyone any good if we have one or two rate cuts, then the Fed has to stop,” she commented. For rate cuts to make a difference in the overall economy, she said they need to be consistent into 2025.
Furthermore, the Fed can’t use what Moore called its “blunt interest rate tool” in some areas of the economy. One area is insurance premiums. While insurance rates aren’t a massive part of the consumer basket, “it really stings when people receive an increase in their premiums or can’t get insurance in some areas of the country,” she commented.
Insurance rates are on the rise, especially as climate-change-related weather hazards grow in scope. This has a definite impact on commercial real estate.
Moore explained that while insurers are increasing premium rates, “most are trying to dig out of holes. They’ve been paying for the results of a huge confluence of events, at the same time, which impacts all the people and companies they insure.” As such, “I don’t think we can say they’re just printing money,” Moore added.
Another area is food prices. Though the increase in food prices isn’t as high as it was about a year ago, it’s still up there. Moore explained that if weather and geopolitical issues impact overall production, interest rate cuts won’t have much impact. The Fed can’t control energy prices, either, but “those will also have an impact on prices,” Moore said.
Investment Considerations
In January 2024, Blackrock acquired Global Infrastructure Partners. From that point, Walker asked about AI derivative investments based on artificial intelligence and other technologies.
Moore noted that while there’s been much discussion around data centers and the growing need for their capacity, the conversation also focuses on cooling equipment to manage climate within these centers. “You need software and cloud services to support the data centers, so there’s another technology infrastructure that’s part of it,” she said. There is also the AI boom. “To be honest, I don’t think we know about the full scope of the AI derivative trades right now,” she remarked. “We have a sense that this technology is going to be transformational. But we don’t have perfect use cases for every company in every industry and every consumer that will use it.”
Additionally, Moore favors cyber security companies, especially the platform companies that offer interconnected solutions.
Companies must safeguard proprietary data, especially as more data goes into the cloud and more AI tools are used. “You want to make sure that no one can hack into your business operations and take your IP,” Moore added. “I think that cybersecurity is an area that’s more “Teflon” in terms of spend than other software areas.”
Looking Ahead: The Election
With this year involving a presidential election and multiple congressional seats up for grabs, Walker and Moore discussed the potential impact. Moore said that while there will be “a decent ride of ups and downs until the end of the year,” but anticipates that the equity market will end higher, regardless of the election outcome. Moore added that the presidential election, while generating most of the headlines, won’t be as impactful as congressional elections. The president can issue various executive orders. However, “the real structural changes have to come from the support of Congress,” she added.
In addition, equity markets prefer certainty. Said Moore: “Even if it’s not exactly the policy that a company likes or might support themselves, there comes a sense of relief that everyone can operate in whatever framework occurs.”
On-demand replays of the June 5 Walker Webcast are available through the Walker Webcast channels on YouTube, Spotify and Apple. Subscribe to get invites, replays and articles for new Walker Webcast episodes every week.
The post Walker Webcast: Blackrock’s Kate Moore Discusses the Economy, Investments and the Election appeared first on Connect CRE.