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Written By Tim Pierotti
The current consensus Wall Street narrative regarding this administration’s economic policy goes about like this: Bessent et al want to slow the economy to get rates down. With lower rates, companies will be able to refinance more cheaply and that will put the economy in a better position to grow longer term.
For what it’s worth, we don’t buy that narrative. Our view is that the President firmly believes in punitive tariffs and the need to deconstruct the federal bureaucracy. His advisors provide the necessary succor that slower growth is actually a positive outcome as slower growth will beget lower interest rates, which are needed as the government and corporates need to refinance a wall of debt over the coming year. Either way, it is a dangerous game and the most radical economic experiment since the end of WW2, sure to be rife with unintended consequences.
If any industry should benefit from this strategy, it should be housing given no other industry is more sensitive to long-term rates. With the Ten-year yield down from over 4.8% to roughly 4.3% this morning, one would think that housing stocks might look through the current economic slowdown and discount stronger growth in the future. That isn’t happening as the XHB (The S&P Homebuilders ETF) has fallen over 20% from recent highs.
The XHB may just be the single best barometer of how the President’s policies are working. To state the obvious, stocks discount the future, not current conditions. Typically, when rates have fallen, housing stocks outperform the rest of the market, but this time housing-related stocks have sold off consistently during a period when rates have fallen week after week.
The message, in our view, is that investors see demand weakness trumping (pun intended) the benefit of lower rates. We have many times repeated the Ed Leamer quote that housing is the business cycle. If lower rates fail to stimulate a stronger housing market, the experiment will end badly.
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