Recession Heroes: INDS, XLRE, RSPR Real Estate Funds
Selective readings?
When you read news articles, about US stocks, Crypto, US economy etc.. do you selectively read only the “good” stuff eg. positive news or are you indifferent ?
For myself, I like to read about all things under the sun.
That means news articles that are the good, the bad and the ugly.
When it comes to US stock market, nothing is impossible.
One only needs to hark back to March 2023.
Who would have thought that US banking sector will encounter a bank run in this century, aided by social media platform -“X” (former Twitter).
Which is why when I came across the above post, I did not hesitate and read it.
Wasn’t it Jamie Dimon CEO of $JPMorgan Chase(JPM)$ who said the same thing recently? (see above)
Is there any truth about a looming recession?
Back to the post.
In recent months, there has been increasing chatter about the possibility of the US economy entering a recession, with several indicators flashing red.
On 01 Jun 2024, investment research platform Game of Trade tweeted on “X”, offered a deep dive into the intricacies of economic indicators suggesting a potential recession on the horizon, with (a) housing market trends and (b) unemployment rates playing pivotal roles.
According to the analysis, housing is a crucial leading indicator for recessions, with rising unemployment being the most significant characteristic of economic downturns.
US existing home sales chart : Bloomberg
The platform acknowledged that historically, the gap between recessions averages about 5.5 years, indicating that the next recession could be expected as late as 2026 if this pattern holds. (see above)
However, the analysis pointed out that economic cycles are not purely about average timing.
External shocks such as (1) oil crises, (2) pandemics and (3) market crashes have historically triggered recessions, making them difficult to predict.
Weakening house markets
Despite this, one reliable precursor remains a weakening housing market.
Data tracking 2-year housing sales reveals that when housing markets falter, a recession often follows with a slight delay.
Game of Trade finding also suggested a strong correlation between housing market trends and unemployment rates.
By shifting housing market data forward by 18 months, a near-perfect correlation with upcoming recessions and recoveries emerges. (see above)
“This happens because housing is highly sensitive to interest rates. When the Fed hikes rates, housing feels the impact first. Whereas, the rest of the economy takes more time to feel the lagging effects of rising rates,” the platform noted.
Additionally, the insights observed that the unemployment rate takes time to bottom out during all recessions and then rise.
The only exception to this pattern was in year 2020 when the pandemic caused a massive and immediate economic shock.
At the moment, the unemployment rate has been rising since April 2023, marking about a year of increase.
Historical comparisons show that it took:
About one year of rising unemployment before the recessions in 2000 and 2006 and approximately 1.5 years in 1989.
Next recession timeline?
Therefore, the assessment noted that if the housing market’s predictions hold true, a recession could occur by late 2024.
However, the historically low unemployment rate might delay its onset.
Additionally, significant government spending in recent years could further postpone the next recession.
Such heavy spending, unseen since the 1960s, delayed the recession until spending levels normalized back then, potentially mirroring the current economic landscape.
My viewpoints: (mine only)
Economists generally agree an Unemployment rate between 3% and 5% signifies a healthy balance.
This is because:
Too low (below 3%) can lead to inflation as employers compete for a limited pool of workers, driving wages up.
Too high (above 5%) indicates a weak economy with people unable to find jobs. This can strain consumer spending and hinder economic growth.
Looking at US unemployment rate for April 2024, it stood at 3.9%; within the “acceptable” range.
It still has a buffer of 1%, give or take.
More importantly, the past 12 months unemployment stayed within the permissible range.
Above traces US’s new home sales for the past 5 years.
In March 2020, when covid was officially declared a pandemic, new home sales initially fell.
However, 2 months later demand spiked instead of falling further.
Throughout 2020 and 2021, demand had its ups and downs.
Even in March 2022 when the first interest hike was carried out, new hme demand was on the rise.
In May 2023, the last interest hike was raised and it remained status quo since.
Between the first & last interest hike, demand for new home sales had its ups & downs as well.
A new house is a “big ticket item” and it’s mortgage takes many years to settle.
Therefore, an elevated interest rate “for longer” is a deterrent for new home owners.
With the most recent CPI and PCE inflation data out, April data shows that inflation remains strong and resilient but at least it is not rising higher.
Coupled with a “falling” 2nd estimates on US Q1 2024 GDP, implies a possible cooling economy that would be music to the Fed’s ears.
This explains why many analysts see this as “good” omen and forecasted that the Fed has a 47% chance of cutting interest rate in FOMC September 2024 meeting, with the caveat that economic data continues to show activities slow down.
The housing sector/ market is still -25% (approximately) off its general demand level.
A -0.25% interest cut will resuscitate the housing sector, for the fundamental reason that everyone needs a roof over his head.
Performing Housing Fund/ETFs.
There is never a better time than now to consider diversifying your portfolio and consider housing funds or ETFs. Below are the Top 3 US funds/ETFs to consider.
$PACER INDUSTRIAL REAL ESTATE ETF(INDS)$ - YTD performance +11.21%.
$Real Estate Select Sector SPDR Fund(XLRE)$ - YTD performance +8.88%
$Invesco S&P 500 Equal Weight Real Estate ETF(RSPR)$ - YTD performance +8.19%.
Everytthing else being equal, the possibility of a market rallying from September 2024 onwards is “real”!
What About The Recession?
Well, if it were to happen, it will likely materialize after the incoming President has been sworn in. Then it will be anybody’s guess. Welcome 2025!
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