REITs Weakening on Obama Tax Hike Proposal?

“Growth begins when we begin to accept our own weakness.” - Jean Vanier

I've been watching the performance of Real Estate Investment Trusts (REITs) in recent days and have noticed that there has been quite a bit of weakness kicking in. The timing of the underperformance seems to be coinciding with President Obama's 2013 budget proposal, which includes a provision to raise the dividend tax substantially for high-income earners. While it is unlikely the proposal goes through, near-term fear over changing tax treatments to dividend stocks could explain why leadership appears to have ended in income-producing REITs.

Take a look below at the price ratio of the iShares Real Estate ETF (IYR) relative to the S&P 500 (IVV). As a reminder, a rising price ratio means the numerator/IYR is outperforming (up more/down less) the denominator/IVV.



It is curious to see that the ratio peak of around 0.46 which has been hit two other times in the past three years is right around when the budget proposal was announced, with a sharp sell-off in those shares. Because REITs pay out a substantial portion of their earned income in the form of dividends, the move directly impacts investor sentiment in the industry. The trend down in underperformance appears to be fairly early, with more room lower to go. This remains a good area of the market to watch though should an overreaction occur to the budget proposal to increase dividend taxes, particularly if the idea gets scrapped.

Either way, weakness in REITs and income-oriented areas of the market are consistent with the idea of reflation I keep stressing. For those unfamiliar with my overall macro theme for 2011, which I believe could be similar to 2003 and 2009 for risk-assets, I encourage you to watch a recent interview I did at the NASDAQ Live. The segment can be viewed at http://www.ndtv.com/video/player/nasdaq-live/us-stocks-rise-on-strong-economic-data-greek-bailout-news/224105 around the 10 minute 30 second mark.

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