One development in the markets since mid-May has been the growing disconnect between inflation data and forward-looking inflation indicators. Essentially, inflation continues to run hotter than expected with the June CPI headline figure coming in at 9.1% vs consensus expectations of 8.8%.
However, forward-looking inflation indicators are plummeting at a rapid rate which is also consistent with what we see in many parts of the economy and commodity markets. It's also evident in what we see in longer-duration bonds which continue to rally and find a bid even amid worsening inflation. Of course, this only makes sense if bond investors believed that inflation and interest rates were about to turn lower.
But, we are seeing assets that are connected to long-duration bonds such as housing stocks. A rally in long-duration bonds also means that mortgage rates will turn lower which improves housing affordability and should result in stronger demand. It's also been the biggest headwind for the housing market in recent months.
Thus, the housing industry should see a positive tailwind from rates gradually moving lower even if it could face a negative headwind from a worsening economic outlook. Another positive catalyst for the sector has been the normalization of supply chains which is leading to costs declining and construction times improving which is supportive of higher margins.
As a result of these 2 bullish catalysts, housing stocks have put together very impressive rallies over the last month as they are currently priced at very attractive valuations and continue to have bullish, longer-term fundamentals.
We can see this with the SPDR S&P Homebuilders ETF
These stocks have been mired in a bear market for more than a year. However, they are historically cheap and have already priced in a lot of bad news. For investors who continue to believe in the long-term story that more housing needs to be built, these stocks could offer significant upside especially if inflation moves lower and the economy remains resilient.
