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By Mike Rode - February 22, 2019
Despite generating good income and solid earnings, U.S. real estate investment trusts (REITs) generally underperform the broader market when rates rise and outperform when rates are stable or falling. That's one reason why we believe the Federal Reserve's (Fed's) January 30 decision to hold the federal funds target rate steady in a range of 2.25 percent to 2.50 percent should be a positive catalyst for REITs over the next year.
In December 2018, the central bank suggested it might raise rates twice in 2019. After the January meeting, however, Fed Chair Jerome Powell said the case for doing so had “weakened somewhat” given slowing global growth and muted U.S. inflation. The Fed's post-meeting policy statement also omitted explicit references to future rate hikes.
REITs are off to a strong start so far in 2019, outpacing broader equities. History also suggests that momentum for REITs may continue if the Fed's tightening cycle is complete and underlying fundamentals remain intact.
Because the higher cost of borrowing has prevented many people from entering the housing market, we like apartment, single-family rental and manufactured housing REITs. And in the health care REITs space, aging baby boomers are fueling continued growth and demand for senior housing.
We think REITs are poised to outperform equity markets in 2019. Download our Notes from the Real Estate Desk to learn why.
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Investment return and principal value of security investments will fluctuate. The value at the time of redemption may be more or less than the original cost. Past performance is no guarantee of future results.
The opinions expressed are those of American Century Investments (or the portfolio manager) and are no guarantee of the future performance of any American Century Investments' portfolio. This material has been prepared for educational purposes only. It is not intended to provide, and should not be relied upon for, investment, accounting, legal or tax advice.