One Key Lesson From the Federal Reserve's 'Hate Mail'
A deluge of bricks, two-by-fours, and heavy tools buried the Federal Reserve mailroom...
It was 1980. And Fed Chair Paul Volcker had just put the U.S. economy in a stranglehold to cool soaring inflation.
Inflation was at a dangerous 9% – and rising – at the time he was appointed. Stopping this trend was Volcker's top priority.
Normally, a Fed chair will raise interest rates to rein in spending and cool down inflation. But Volcker took more drastic steps. He targeted the money supply itself.
As a result, interest rates started moving on their own. The federal-funds rate soared to a record high of 20% in 1980... And businesses were paralyzed.
Then the protests started.
Car dealers mailed coffins holding the keys of unsold vehicles to the Fed headquarters. Farmers blockaded the front doors with tractors.
But the most strenuous opposition came from homebuilders...
Contractors flooded the Fed with hate mail and unused construction supplies. Volcker even displayed one item as a trophy – a colorful sledgehammer sent by the citizens of Tennessee to "drive down interest rates."
You can still see one of the two-by-fours in the Museum of American Finance today. Take a look...
The homebuilders' protest in the 1980s shows how deadly high rates can be for home construction. But the inverse is true, too... Falling rates can be a big tailwind for the companies that build homes.
And today, in our current falling-rate environment, we can expect homebuilder stocks to outperform...
Current Fed Chair Jerome Powell hasn't caused as much drama as Volcker. But he has certainly walked in Volcker's footsteps...
After the COVID-19 pandemic, the global economy ground to a halt. Supply chains broke all over the world. And the government added $5 trillion in stimulus to the U.S. financial system.
Of course, all of these forces are inflationary. Consumer prices soared... And like Volcker, Powell had to intervene. To cool inflation, he brought the fed-funds rate to its highest level since before the great financial crisis.
But just like we saw in the '80s, high rates are a headwind to homebuilders.
That's because buying a home is an easy-to-postpone expense. Mortgage rates may be prohibitively high today, but you don't have to buy that house right now. You can simply wait... And the higher rates climb, the more folks do just that.
That leaves homebuilders with no incentive to build. But the opposite is also true...
Falling rates turn these headwinds into tailwinds. As rates fall, more home-construction demand gets pulled into the present. That brings in more revenue for builders. And home-construction stocks can soar as a result.
That's the situation we're in today. The Fed finally ended its cycle of rate hikes.
It issued its first rate cut since 2020 last month. And last week, the SPDR S&P Homebuilders Fund (XHB) went on a rare four-day win streak. Take a look...
As you can see, homebuilders are up around 30% year to date. And last week, they closed higher for four consecutive days – a rare bullish signal that tends to lead to further outperformance.
Tight fiscal policy has held homebuilders back since the pandemic. But today, the worst is likely in the past.
Falling rates are an ideal backdrop for home-construction stocks. So as the Fed turns away from tight monetary policies, pay close attention to this sector.
Good investing,
Sean Michael Cummings
Further Reading
"Normally, you might not think much about the relationship between mortgage rates and stock prices," Brett Eversole writes. And as he shows, housing plays a big role in the U.S. economy. Interest rates and mortgage rates falling together will provide huge stimulus for the stock market... Read more here.
"Housing activity is already showing signs of life," Brett writes. "And the trend is about to kick into high gear." Homebuyers who took advantage of historically low mortgage rates after the pandemic now feel trapped in their homes. But the powerful trend in place shows it's likely we'll see mortgage rates fall below 5% by the end of next year... Learn more here.
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Autodesk (ADSK)... software and 3D modeling
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Iron Mountain (IRM)... data-storage REIT
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SL Green Realty (SLG)... shopping-center REIT
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