Q4 2023 Market Update: Key Metrics and Insights for Smart Investments

Investors are always asking me, 'AJ, what are you looking at?, What do those numbers mean?, Why are you looking at that?'.

They want to know exactly what metrics I look at when evaluating the market and so I've decided to create a monthly Market Update and send you the most up-to-date data that I look at.

In these updates, I'll break down important market data for you right here so you can have one, concise place to find the latest and greatest information on the market.

All of these metrics are tools that I look at to make decisions about my deals, and they play a huge role in understanding the market and how it affects self-storage and real estate.

The biggest metrics that I spend most of my time evaluating that we're going to talk about today are Employment, Inflation, Interest Rates, GDP Growth, and Income Growth, and how ALL of these metrics play a role in my market analysis.

So, let's dive in...

Employment and Inflation 

As you might already know, interest rates are directly tied to inflation. Metrics like employment numbers and inflation rates are imperative for me to know to understand the market as it relates to real estate investing and any deals I buy.

Why? Real estate is directly affected by high inflation rates because when interest rates are high, so are housing prices. Simple.

This in turn causes no one to buy real estate and move, which directly affects self-storage because, as you know, we rely heavily on movers within our industry. 

Why do I look at the unemployment numbers? 

The Fed wants unemployment to rise and they take a look at employment as an indicator of how that affects the prices of goods and services.  

In October, the unemployment rate changed very little (3.9%), along with the number of unemployed (up to 6.5 million people). (source)

When there is a rise in unemployment, this drives down demand and causes inflation to go down.

The Fed is also looking at the overall inflation rate as a trend. 

They're trying to balance a fine edge of bringing down inflation but not creating deflation and tanking the whole economy. 

Remember, there is a difference between inflation, disinflation, and deflation:

Inflation: Increase in the price of goods and services

Disinflation: A decrease in the rate of inflation

Deflation: A decrease in the price of goods and services 

See: Inflation, Disinflation and Deflation: What Do They All Mean?

Since March 2021, inflation has been above the Federal Reserve’s 2% target (averaging 1.7% annually between 2016 and 2019).

Inflation seemed to peak in June 2022 and has been trending downward for the last year or so, at least until July of 2023.

Currently, the annualized inflation rate for goods and services in 2023 is 3.6%, which is closer to the nominal rate.

But take note that because inflation is not considered ‘high’ or continuing to rise, this doesn’t mean that the actual price of goods and services will come down.

Inflation is just not rising as fast. 

The target inflation rate is around 2%, so 3.6% isn’t that much of a difference, and it’s obviously much better than the 8-9% we did have. 

But until we see a 2% and below rate for a sustained period, the Fed will not make any big changes. 

The reason why I think these points are so important is this: 

When this happens, we will likely know, or at least be closer to knowing, when the interest rates will go down. 

Interest rates going down is like fuel to the economy that makes the economy ferociously speed up and eventually burst. 

So as interest rates are high, the economy is hamstrung. It’s crippled.

But at the same time, the Fed cannot lower interest rates with inflation.

GDP Growth

Real gross domestic product increased at an annual rate of 5.2%  in Q3 2023, according to the second estimate released by the Bureau of Economic Analysis. 

Compared to Q2, the acceleration in real GDP in the third quarter showed increases in consumer spending and private inventory investment and an increase in exports that were offset by a reduction in nonresidential fixed investment (source).

What’s so fascinating about this is that the GDP is growing and expanding even with high-interest rates. 

The goal of rising interest rates is to contract the money supply and put us into a recession, which is a normal business cycle. 

But for inflation rates to change at all, this GDP growth needs to change.

We need to see a slowdown and contraction of the GDP, which we’re not seeing currently, for there to be any change in inflation.

 Income Growth

Personal income increased in 49 states and DC in Q2 2023, according to statistics released by the BEA.

Nationally, personal income increased by $239.7 billion dollars in Q2 2023, which was ultimately affected by overall earnings, property income, and transfer receipts.

Earnings increased 5.3% and property income increased, growing 3.7%. 

How does this correlate to the market when I analyze income growth metrics? 

Income growth at low unemployment will keep demand high. 

Income growth comes from a tight labor market and will continue to stay high if you have tight labor pools simply because there is competition for workers.  

What we’ve started to see though is a reverse in employment numbers, where the numbers are on the rise, and you can see this in the easing of overall income growth and income spike that we had been seeing over the last year or so. 

What we don’t predict to see anytime soon is that continual growth in income as we did before.  

Something interesting to note is the fact that the high interest rates we saw were offset by a huge, massive amount of cash on hand.  

So even though there were saving rates that were historical highs just two years ago, we have depleted them because Americans just kept spending. 

We were spending on borrowed credit cards, and spending out of our savings and bank accounts. 

But now, cash on hand is drained. Americans have stopped buying things, which therefore will drop the demand for goods and services. 

So, What’s My Outlook?

We believe that Americans have now burned out of a lot of mainstream cash. Credit cards are being maxed out and there’s a contraction in businesses and markets due to the lack of expenditures. 

What’s available for credit and credit card debt is now crushing these people, so they have to stop buying things. 

This causes consumers to stop, unemployment to rise, and the price of goods and services to go down. 

Only then will the Fed will lower interest rates to try to spur growth again, ultimately returning us to a new normal part of the business cycle. 

We’re in a huge transition time from a pre-covid booming market to a new market cycle that’s most likely to happen in 2024.

Do we know what kind of transition it’s going to be? Are we going to have a soft landing or get our butts handed to us? We have no idea.

The economy has been very durable up until now, to the surprise of a lot of people.

We’ll hopefully see a return to a new normal market cycle where rates will be reduced, normal economic activity will occur, and more capital will be deployed into things like the housing market.

This means more people will be moving, and we will see the housing market recover with a reduction in 30-year and 10-year mortgage rates.

But when do I think this is going to happen?

We’re estimating that it will take place next year, possibly Q1 of 2024 with a contraction in Q4 of 2023.

To wrap this all up….

You cannot time the market, but you do have to understand it. 

There is no way to time the market, but you do have the ability to use these metrics as tools (economy, interest rates, employment rates, etc) to understand where the market is so you can continue to find and purchase good deals.

Whether markets are up, down, or flat….I’m still buying. 

It’s just the amount of what we can currently buy and what we can do with is constrained by what the market is giving us right now.

By analyzing inflation, unemployment, GDP growth, and income growth, I’m able to make smarter overall investment decisions for myself and my investors. 

We strongly believe that investment activity (for us at Cedar Creek Capital) and the performance of our assets are going to pick up in 2024 based on this data.