Inside the Cafe

An incredible (and record) one day gain of 8.81% in the MSCI REIT Index has pushed the REITcafe Volatility Index (RVI) to a new record high of 426.11. This represents a one-day jump in the RVI of nearly 130 points. The RVI had moderated in recent weeks as the REITs followed the broader markets into a steady decline to open the New Year. By the end of trading this past Friday (January 18th), the MSCI REIT Index had already registered a decline of 10.69% for 2008. After the close of trading yesterday (January 23rd), only two trading days later, the MSCI REIT Index is actually up 0.45% for 2008. As can be seen on the “Relative Volatility” graph below, REITs have been consistently more volatile over the past twelve months than either the Dow Jones Industrial Index, NASDAQ Composite Index, or the S&P 500 Index.

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The REITcafe Volatility Index (RVI) has once again hit a new record high. The RVI registered 398.95 on Friday, December 14, 2007. At this level, the RVI shows that REITs are currently four times as volatile as they have been historically. The volaility gap between REITs and the broader market remains exceptionally wide as well. As can be seen on the “Relative Volatility” graph below, REITs have been consistently more volatile this year than either the Dow Jones Industrial Index, NASDAQ Composite Index, or the S&P 500 Index.

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As the MSCI REIT Index experienced its largest one day decline of 5.58%, the REITcafe Volatility Index (RVI) spiked to a new record high of 391.38 on Tuesday, December 11. This represents the fourth straight trading day in which the RVI has set a new record high and the fifth time it has set a new record in the past two weeks. At its current level, the RVI shows that REITs are now nearly four times as volatile as they have been historically. The volatility gap between REITs and the broader market continues to widen as well. As can be seen on the “Relative Volatility” graph below, REITs have been consistently more volatile this year than either the Dow Jones Industrial Index, NASDAQ Composite Index, or the S&P 500 Index.

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(Click on Graph to View Full Size Image)

Beginning today we will begin publishing rolling 12-month correlations for the MSCI REIT Index on a daily basis. Each Monday we will publish the correlations through the end of the previous trading week in the REITcafe Newsletter. REITcafe will also update the correlations on its website on a daily basis. Correlations between the MSCI REIT Index and the Dow Jones Industrial Index, NASDAQ Composite Index, and the S&P 500 Index will be calculated at the end of each trading day.

REITs Are Now More Correlated to the Broader Stock Market Than at Any Time in History.

The 12-month correlation between REITs and the broader stock markets is currently running at its highest levels ever. As shown on the long-term history graph below, the correlataion between REITs and the broader stock indices is currently above 0.7. As of Friday, December 7, 2007, the correlation between the MSCI REIT Index and the Dow Jones Industrial Index was 0.727. The correlation with the NASDAQ Composite Index was 0.740 and the correlation with the S&P 500 Index was 0.762. To put this in perspective, a perfect correlation would be a 1.0 while no correlation at all would be a 0.0.

Is the Correlation of REITs to the Broader Markets Cyclical?

As can be seen on the graph below, the 12-month correlation between REITs and the three major stock indices displays clear elements of cyclicality. The correlation of REITs to the broader markets has run on five year cycles in the past. The correlation cycles in the past have begun with REITs showing a relatively low correlation to the broader markets. The correlation then increased for three to four years and then finally cycled down for about one year. We are currently in the third year of increasing correlations for REITs. Only time will tell how long correlations will continue to trend up or what level those correlations reach.

(Click on Graph to View Full Size Image)

For the second time in less than two weeks, the REITcafe Volatility Index (RVI) has set a new record. The RVI hit an all time high of 361.59 on Thursday, surpassing the record it had set just eight days earlier on Wednesday, November 28. The volatility record fell as REITs experienced their second straight day of 3% plus gains. At its current level, the RVI shows that REITs are now more than three times as volatile as they have been historically. The volatility gap between REITs and the broader market is widening as well. As can be seen on the “Relative Volatility” graph below, REITs have been consistently more volatile this year than either the Dow Jones Industrial Index, NASDAQ Composite Index, or the S&P 500 Index.

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