Powell Remarks Overshadow Inflation Good News as Stocks Continue to Tank

High inflation begat recession fears begat a stock market slump. As the U.S. stock market closed Thursday, it logged the worst first half of a year in 52 years.

Ironically, there was some small hope on the inflation front earlier in the day. Inflation, as measured by the Personal Consumption Expenditures index, cooled slightly in May on an annual basis, to 6.3%. The consensus was for 6.5%.

May’s actual number was the same as for April, which represents a slowing from before. The March showing was 6.6%. Excluding food and energy, the May PCE reading is markedly lower, at 4.7%, versus April’s 4.9% and March’s 5.2%.

But Federal Reserve Chair Jerome Powell stamped out the flurry of hope Wednesday by his hawkish remarks at the European Central Bank’s annual economic policy conference in Portugal. He said he was more worried about failing to pull down inflation than the Fed’s pumping up interest rates too high and producing a recession.

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“Is there a risk we would go too far? Certainly, there’s a risk,” Powell said. “The bigger mistake to make—let’s put it that way—would be to fail to restore price stability.”

This downbeat message resonates with the market and the public, said Bryce Doty, senior portfolio manager at Sit Investment Associates. “Powell expects the unemployment rate to rise,” he wrote in a research note. “So we get slower growth, more people out of the workforce, and still have to cope with nagging inflation.” He added, “It’s no wonder people feel like we are in a recession as they are finally forced to dip into their savings to maintain their lifestyles.”

Bill Adams, chief economist for Comerica Bank, wasn’t impressed that consumer spending rose in May. “That was all people eating higher prices,” he said in a note. “The volume of consumer spending was down on the month, with a noticeable pullback in spending on durable goods.”

Is there a silver lining to the first half’s dismal market performance? Quincy Krosby, chief equity strategist for LPL Financial, noted that the second half of 1970 saw the S&P 500 stage a strong comeback.

As student debt chokes legions of people, student housing has become an investor’s bonanza. So much so that private equity is into it big-time. Latest evidence: KKR reportedly just sold seven student housing properties for $725 million.

As reported by Bloomberg, the giant PE firm’s student housing arm sold the properties, which collectively have 4,500 beds, to Harrison Street, which has a large student housing portfolio, as well as senior living complexes, life science facilities and storage facilities. KKR declined to comment on the deal, and Harrison Street couldn’t be reached. It couldn’t be determined what KKR originally paid for the real estate.

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KKR’s University Partners, in business for 15 years, also continues to buy student housing. In April, it bought an 801-bed property serving students at Texas A&M, according to its LinkedIn page. The subsidiary has spent $1.2 billion for 10,000 student housing beds since its inception.

Other PE firms are at work in this space. Last year, for instance, Blackstone Real Estate Income Trust paid $784 million for a majority stake in a group of eight student housing properties with 5,416 beds.

U.S. student housing deal volume increased 121% in 2022’s first quarter from a year earlier, to $2.4 billion, according to MSCI’s real assets unit. This year, student housing average cap rates (real estate lingo for return on investment) are at a not-bad 5.1%. That’s 0.40 percentage point above conventional multifamily facilities, says a study from Berkadia, a large commercial real estate company with a research unit.

Sales of student housing set a record in 2021, at $9.6 billion, with the average price per bed also at a high, $84,791, says the Berkadia study. And 109 student housing projects are under construction nationwide, with the bulk of them in the Southeast.

All this real estate activity comes amid a decline in student enrollment over at least the last four years. But analysts expect the slump to turn around, and recent developments may show they’re right. The number of students arriving for spring semester 2022 increased 4.2% compared with the year-before period, per the National Student Clearinghouse Research Center.