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The New Bull Case: Soft Landing Plus Insurance Cuts
In the latest edition of the Weekly, I suggested the unofficial consensus is still that the US economy will succumb to a recession one way or another.
Either the labor market and spending will prove too resilient, imperiling the inflation fight and forcing the Fed to turn the screws until "something breaks," or the drag from tightening already delivered will finally manifest in a significant slowdown. Either way, a soft landing is exceedingly unlikely. Or so goes one narrative.
Among market ob
The RUT rally was short-covering. Investors are making their 2024 “long” shopping lists.
If the 2024 scenario is inflation down, insurance cuts in short rates, soft landing, what’s the list of longs?
Some possibilities:
– Banks, especially regionals, look list-worthy. Lower short rates -> lower deposit cost. Looming regulation -> more capital -> suppressed lending -> loan rates stay higher for longer. Higher NIM and NII should be “good enough” even if no improvement in ROTE. Soft landing implies credit quality won’t get too bad. No relief for CRE but that’s so well-known that it should be priced in by now.
– Builders too. Lower short rates and inflation should bring long rates down (bond investors think so). Lower mortgage rates -> more sales and lower costs. Competition from existing homes may lag, if sellers still need to adjust expectations. Various building materials names, mortgage insurers, title and credit reporting too. Brokers have commission risk, and the fintech brokers probably need business model repair.
– REITs, probably. Lower rates -> bond proxy benefit. Lower inflation -> cost growth slows. Soft landing -> occupancy stays okay-ish. REIT groups suffering from supply growth (e.g. MFD) are going to see relief anyway, as previous high rates show up in lower supply in a year or so.
Generically, seems any small cap group that has underperformed greatly is worth a look, just on the tone shift from recession to soft landing that makes investors look down-cap.