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The Fed Blinked. Green Light to Buy Real Estate Stocks?

XChange NewsletterJanuary 03, 2024
six traffic lights all showing green, on a dark blue sky background

Editor's note: Any and all references to time frames longer than one trading day are for purposes of market context only, and not recommendations of any holding time frame. Daily rebalancing ETFs are not meant to be held unmonitored for long periods. If you don't have the resources, time or inclination to constantly monitor and manage your positions, leveraged and inverse ETFs are not for you.

It’s no secret that rising interest rates can be kryptonite for the real estate market. That explains why the last couple years have been so tough for stocks in the sector. The Federal Reserve has been hiking relentlessly, and long rates have followed suit. But that looks to be changing—and traders have put a bid under real estate equities since early November. The Real Estate Select Sector Index* is up over 24% since bottoming, according to S&P Dow Jones Indices.

Does this trend have legs, or is it a sucker’s rally begging to be faded?

Below is a daily chart of the Real Estate Select Sector Index as of December 15.

Daily chart of the Real Estate Select Sector Index as of December 15

Source: as of 12/15/2023

Candlestick charts display the high and low (the stick) and the open and close price (the body) of a security for a specific period. If the body is filled, it means the close was lower than the open. If the body is empty, it means the close was higher than the open. The performance data quoted represents past performance. Past performance does not guarantee future results. One cannot directly invest in an index.

The Real Estate Select Sector Index is comprised of real estate management and development stocks, as well as real estate investment trusts (excluding mortgage REITs). The top holdings in the index as of December 13, 2023, include Prologis, Inc. (NYSE: PLD), American Tower Corporation (NYSE: AMT), Equinix, Inc. (NASDAQ: EQIX). Historically, these stocks tend to do well when interest rates are low or declining, and the U.S. economy is strong.

To see the fund’s full holdings, click here. Holdings are subject to change and risk.

Expectations of Lower Rates Have Caused Real Estate Stocks to Soar

Higher-for-longer was the mantra of both the Fed and Wall Street for much of 2023 when it comes to interest rates. That narrative has obviously been a drag on real estate stocks as investors feared yet more rate hikes and the potential for even higher long-term Treasury yields. Until the last six weeks, that is.

As it often does, the bond market seems to have sniffed out a Fed pivot before it was official: The benchmark 10-year Treasury yielded nearly 5% in late October. Today it’s under 4%. And the Fed surprised many analysts at the December 13 Federal Open Market Committee (FOMC) meeting by suggesting that three interest rate cuts could be in the cards for 2024.

Real estate stocks just so happened to bottom soon after long-term yields peaked, and they’ve now erased all their losses going back to August. Investors are clearly betting that rates are headed lower and that the economy will remain strong enough for demand to hang in there.

Potential Catalysts for Real Estate Stocks

The real estate sector has been on fire lately. Whether this run has legs might depend on the following catalysts that traders should closely monitor:

  • Fed Policy: The next FOMC meeting is January 30-31, 2024. Having dangled the carrot that rate cuts could be on the agenda for the new year, investors will want to see clues that hope is set to become reality. The CME Group’s FedWatch tool indicates only a 10% probability of a cut at this meeting, but expectations could change as the meeting draws nearer.
  • Inflation: Fed policy (as well as the bond market) could be influenced by the December Consumer Price Index (CPI)* report, set to be released on January 11 at 8:30am ET. A miss (higher than expected) could send rates higher and real estate stocks lower. On the other hand, another soft CPI print could be music to the ears of real estate bulls.
  • Retail Sales: To have a strong real estate market, you need consumers and businesses with growing incomes. For that reason, traders should keep an eye on the December retail sales report which will hit the wires on January 17 at 8:30am ET. A strong number will be good news for real estate stocks—a weak print, not so much.

Bull or Bear, Here’s How to Play Real Estate with Leverage

Traders bullish on the near-term prospects for real estate stocks can express the view with the Direxion Daily Real Estate Bull 3X Shares (Ticker: DRN), which seeks daily investment results, before fees and expenses, of 300% of the performance of the Real Estate Sector Select Index*. Meanwhile, those traders who think the sector has run too far too fast can play potential weakness with the Direxion Daily Real Estate Bear 3X Shares (Ticker: DRV), which seeks daily investment results, before fees and expenses, of 300% of the inverse (or opposite) of the performance of the Real Estate Sector Select Index.

*Definitions and Index Descriptions

An investor should carefully consider a Fund’s investment objective, risks, charges, and expenses before investing. A Fund’s prospectus and summary prospectus contain this and other information about the Direxion Shares. To obtain a Fund’s prospectus and summary prospectus call 866-476-7523 or visit our website at A Fund’s prospectus and summary prospectus should be read carefully before investing.

Leveraged and Inverse ETFs pursue daily leveraged investment objectives which means they are riskier than alternatives which do not use leverage. They seek daily goals and should not be expected to track the underlying index over periods longer than one day. They are not suitable for all investors and should be utilized only by sophisticated investors who understand leverage risk and who actively manage their investments.

The Real Estate Select Sector Index is provided by S&P Dow Jones Indices and includes securities of companies from the following industries: real estate management and development and real estate investment trusts (“REITs”), excluding mortgage REITs.

Direxion Shares Risks – An investment in each Fund involves risk, including the possible loss of principal. Each Fund is non-diversified and includes risks associated with the Funds concentrating their investments in a particular industry, sector, or geographic region which can result in increased volatility. The use of derivatives such as futures contracts and swaps are subject to market risks that may cause their price to fluctuate over time. Risks of each Fund include Effects of Compounding and Market Volatility Risk, Leverage Risk, Market Risk, Counterparty Risk, Rebalancing Risk, Intra-Day Investment Risk, Other Investment Companies (including ETFs) Risk, Cash Transaction Risk, Tax Risk, and risks specific to the securities of the Real Estate Sector. Real estate securities are subject to risks similar to those associated with direct ownership of real estate, including changes in local and general economic conditions, supply and demand, interest rates, environmental liability, zoning laws, regulatory limitations on rent, property taxes, operating expenses and losses from casualty or condemnation. Additional risks include, for the Direxion Daily Real Estate Bull 3X Shares, Daily Index Correlation Risk, and for the Direxion Daily Real Estate Bear 3X Shares, Daily Inverse Index Correlation Risk, and risks related to Shorting. Please see the summary and full prospectuses for a more complete description of these and other risks of each Fund.

Distributor: Foreside Fund Services, LLC.

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