With strong private consumption and the strength of the service sector, which accounts for more than three-fourths of our gross domestic product (GDP), Powell may be forced to cut rates even further if a resolution of the trade dispute between the US and China is again delayed. The Feds might return to buying short-term Treasury bills, given the looming budget deficit, which is expected to rise to -4% of GDP in 2020

A recession is still highly unlikely, given strong domestic economic factors such as private consumption and low and declining unemployment. So far, the sluggishness in manufacturing has not spread into the service industry, and we believe that the momentum of job creation could be maintained in the service-producing economy. Although real estate valuations appear somewhat stretched in some markets, the prospects of a solid economic cycle may justify our current thinking. In addition, the real estate markets proved to be resilient against rising volatility during the mayhem of 2011 and 2015.

Because of the sluggishness of our manufacturing, the United States Dollar (USD) is appreciating against European Currency. In Europe, for instance, a lack of real alternatives for investors is proving to be the main driver of USD strength. Elsewhere, the high level of uncertainty over the US-China trade talks is exerting pressure on the Chinese Yuan, thus strengthening the USD. The net upshot is less European and Chinese real estate investment being made in our country.

One may argue that rate cuts may weaken the USD; however, cuts have not been the straw that broke the camel's back. They have lowered interest rates twice, and rate expectations have swung around. For now, there seem to be other factors driving the USD. Coordinated rate cuts created a friendly environment with depressed volatility, sustaining demand for real estate investments. As long as rate cuts are followed by other banks, this mechanism will stay in place. As a result, Fed policy may influence the USD for a short time, but other factors may be necessary to undermine USD strength in the long term. In debt outstanding of more than 100% of US GDP, the funding requirements of the mounting fiscal deficit and the negative international investment of around 10 trillion USD are three factors that may be a burden on the USD over a longer period.

In preparing our quarterly report, MARKET CYCLES, we take into account the input from Outlook, our monthly research source. At this point, we still believe that with midsize apartments you still get the best investment dollar for your buck. Midsize apartments generally outperform equities because of its higher yields, greater price stability, and downside protection even in a recession. When stock markets are down (which we project will happen in 2020), they hold value and produce a positive return. They are less prone to booms and busts. Midsize apartments are now stronger than they have been in many years.

ABOUT THE AUTHOR: Eugene E. Vollucci, is considered to be one of the foremost authorities on real estate taxation and investing and has authored books in these fields published by John Wiley & Sons of New York. He is the Director of the Center for RE Studies, an educational and research organization. To learn more about the Center, please visit our web site at http://www.calstatecompanies.com

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