XLRE Real Estate Sector SPDR June Outlook—Still a strong downtrend. Structural headwinds remain in place.
Price Action & Performance
A somewhat hopeful end to 2023 turned out to be fool’s gold for XLRE investors as the nightmare continues for the Sector. Price action in absolute terms is at support, but relative to the benchmark S&P 500 performance continues to deteriorate.
Economic and Policy Drivers
Unfortunately there are good reasons for weak Real Estate performance in 2024. Persistently high interest rates are historically a head-wind to the sector. The Pandemic introduced a technology-enabled, cultural/behavioral head-wind in the form of “work-from-home” that has obliterated the marginal growth prospects of the Commercial Real Estate Industry. Recently weakness has accelerated in other industries within the sector as data centers (DLR, EQIX), tower stocks (AMT, CCI, SBAC) and self storage (PSA, EXR) have all seen prices tumble with the re-emergence of inflation. It’s hard to find good charts or good stories in the Sector. SPG is the most hopeful chart we can find in the large cap. space.
How Can XLRE Help?
Like many sectors that have been long-term laggards, there is potential for reversal if pessimistic expectations go too low and stocks are able show strong sustained earnings power. When that pivot finally occurs a sector product like XLRE with exposure to all areas of the sector at a low cost is a great way to neutralize or go long a position. We go from a negative back drop for real estate to a positive one in two broad ways. Either inflation gauges like CPI start to relent taking pressure off the weakest areas of the sector, or inflation proves strong enough to tip the economy into recession with investors seeking the safety of fixed income and high dividend stocks like REITs.
In Conclusion
XLRE has been a structural laggard since the bull market trend’s inception in early 2023. Unlike other historically defensive sectors, REITs in this cycle haven’t shown enough on the chart to get excited about. XLRE is one of the 0% Sectors in our Elev8 Sector Model netting an UNDERWEIGHT position of -2.18% vs. the S&P 500 weight to start June.
Chart | XLRE Technicals
- XLRE 12-month, daily price (200-day m.a. | Relative to S&P 500)
- XLRE continues to consolidate on absolute terms and lag relative to the S&P 500. We don’t see a catalyst for trend change at this time given the sector’s impairments
