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Hey savvy investors! It’s time for a pre-holidays post from your friendly Dividend Uncle. With a major pivotal decision on the horizon, I felt it was imperative to update all of you before I take a short break. I’ll be traveling with my family soon, so this might be my last post for the next couple of weeks. Okay, let’s dive right into today’s post!

Now, if you’re a REIT investor like me, you’re probably feeling a little frustrated right now. Twice in the past 12 months, we’ve seen potential REIT rallies, once in late 2023 and again in October 2024, only to watch them fizzle out, leaving us no better off than before. In both periods, the potential for lower interest rates fueled the rallies. But instead of sustained gains, we’ve been met with disappointment as expectations dissipated, and the market seems to be stuck in the doldrums.

[Source: Yahoo! Finance]

Adding to the frustration, there’s now talk of inflation reappearing, which has kept REIT investors on edge. But before we wrap up 2024, we’re faced with a critical moment: the Federal Reserve’s December meeting, where they’ll decide whether to cut interest rates for a third time this year.

This decision may set the tone for how REITs perform as we head into 2025. Will the Fed provide the boost REIT investors are hoping for, or will the market remain under pressure? In today’s post, we’ll dive into the key factors influencing the Fed’s decision, what it could mean for us as REIT investors, and how I’m preparing my portfolio for whatever comes next.

Before we dive in, I must let you know that this content is for informational and educational purposes only and does not constitute financial advice. The opinions expressed are based on publicly available information and personal analysis, and they are not tailored to your specific financial situation. The REITs and institutions mentioned are cited purely as examples. While I have no affiliations, sponsorships, or financial relationships with any of them, I may personally hold positions in some of the investments discussed.  Before making any investment decisions, you are strongly encouraged to consult a licensed financial adviser.

Alright, let’s get started!

What’s Driving the Fed’s Decision

The Fed has a lot to consider as it heads into its final meeting of the year. While many of us had hoped for another rate cut in December, the latest economic data has thrown a curveball. Let’s take a closer look:

1. Inflation Remains Stubborn

Inflation has been the Fed’s main focus all year, and unfortunately, it’s still running hotter than they’d like. The Personal Consumption Expenditures or PCE price index, their preferred inflation gauge, rose by 2.3% year-over-year in October, up from 2.1% in September.

And if we look at Core PCE, which excludes the more volatile food and energy prices, it’s even higher at 2.8%, ticking up slightly from 2.7% the month before. What does this mean? The Fed’s 2% inflation target is still out of reach, and this could make them hesitate to cut rates further.

2. A Surprisingly Resilient Economy

Here’s the twist: Despite higher interest rates, the U.S. economy is holding up pretty well. Unemployment remains steady at 4.1%, and consumer spending has been strong, contributing to a solid 2.8% GDP growth rate for Q3.

This resilience in the labor market and overall economy might make the Fed feel they don’t need to rush into more rate cuts. After all, rate cuts are typically used to support a struggling economy, and that’s not the picture we’re seeing right now.

3. Mixed Messages from the Fed

Now, this is where things get interesting. While some market participants are expecting a 25 basis point cut, recent comments from Fed officials suggest they’re leaning towards holding rates steady.

For example, Neel Kashkari, President of the Minneapolis Fed, recently said that any decision to cut rates would depend on inflation data showing more signs of easing. And it’s reasonable to consider a rate cut in December. But if inflation stays elevated, the Fed could decide to pause and wait for clearer signals.

What This Could Mean for REITs and Dividend Investors

Let’s explore the two potential scenarios from the Fed’s upcoming pivotal decision, whether they cut interest rates or decide to hold them steady, and what these outcomes could mean for REITs and dividend-focused investors.

Scenario 1: The Fed Cuts Interest Rates

Based on current market expectations, the futures market reflects a 66% chance of a 25-basis-point rate cut in December. Let’s start with this scenario.

If the Fed announces another 25-basis-point rate cut, it could provide much-needed relief to REIT investors. Lower rates would ease financing costs for REITs over time, giving managers more room to pursue growth initiatives, such as acquisitions or asset enhancements, without worrying as much about rising debt costs. This could lead to improved profitability and potentially higher or more stable dividends, offering reassurance to income-focused investors.

Additionally, market sentiment toward REITs would likely improve, as lower rates make yield-oriented investments more attractive compared to bonds or other fixed-income assets. REIT prices, which have struggled under the weight of high interest rates, could see a meaningful rebound, especially for undervalued REITs offering strong yields. Historically, REITs have rallied during periods of monetary easing, as their discounted cash flows become more appealing in a lower-rate environment.

For dividend investors, this scenario is far more promising. A rate cut would pave the way for REIT valuations to recover, creating opportunities for investors to lock in attractive yields while preparing for a more supportive market environment in the longer term.

Scenario 2: The Fed Holds Interest Rates Steady

If the Fed decides to maintain rates at their current levels, REIT investors may face another round of headwinds. Persistently high borrowing costs would continue to pressure REITs, especially the REITs with higher leverage, limiting their ability to refinance debt affordably or pursue accretive growth opportunities. As a result, distributable income could remain constrained, and the potential for higher dividends might be dampened.

Market sentiment could also take a hit, as a rate pause might signal that the Fed sees inflationary pressures as still too persistent to allow for further easing. For dividend-focused investors, this scenario is clearly less favorable. It may prolong the challenges of achieving stable income, while increasing short-term market volatility as investors digest the Fed’s cautious approach. In this scenario, the emphasis would likely shift to defensive, high-quality REITs with strong operational fundamentals and lower debt exposure.

The Dividend Uncle’s Take

As REIT investors, we’ve seen how sentiment can swing wildly based on Fed decisions. While the outcome of the December meeting is uncertain, I believe this is a time to stay grounded and focus on the fundamentals of your investments. Both scenarios, whether rates are cut or held steady, present challenges and opportunities.

I’m continuing to focus on well-managed REITs with strong balance sheets which could be better positioned to ride through the turbulence. Examples of these in my portfolio include CapitaLand Integrated Commercial Trust, Mapletree Industrial Trust and Frasers Centrepoint Trust.

While Fed’s decision in December will drive short term volatilities, which could be in or against our favor, it’s also worth remembering that market timing is incredibly tricky, and no one can predict how things will pan out with absolute certainty. That’s why I’m focusing my attention at my overall portfolio level. As mentioned in previous posts, I’m raising my cash levels to hold on the sidelines to take advantage of future opportunities, while continuing to dollar-cost average into quality positions that align with my long-term goals. At the same time, I’m continuing to invest in certain growth stocks, such as the US tech, to complement my dividend-focused portfolio.

But as always, please note that my personal portfolio decisions may not be suitable for everyone. Always do your own due diligence and consult a licensed financial adviser to ensure your investments align with your individual financial goals and risk tolerance.

Lastly, while we focus on the Fed, let’s not lose sight of the bigger picture. Economic cycles come and go, but high-quality investments tend to stand the test of time. So whether the Fed cuts or holds rates, let’s stay disciplined, remain patient, and keep our eyes on the horizon.

Alright, folks, that’s all for today’s post. As we approach the Fed’s December meeting, it’s clear that the stakes are high for REIT investors and dividend seekers alike. Whether rates are cut or held steady, staying prepared and focused on quality investments is key.

Before I go, I just want to let you know that my updates may take a bit longer over the next two weeks, as I’ll be traveling with my family. But don’t worry, I’ll be keeping a close eye on my investments, just as I always do, and I’ll miss the interactions with you guys.

Thanks for tuning in, and if you found this post helpful, don’t forget to like, subscribe, and share your thoughts in the comments below. Until next time, happy investing and happy holidays!