Housing starts came in at 1.56MM vs. expectations of 1.36MM and the prior month at 1.37MM. Housing starts are a critical leading indicator of the economy as 11 out of 12 post-WWII recessions were precipitated by a collapse in housing in response to a Fed tightening cycle. The average level of housing starts during a recession was less than 900,000 with the low being 500,000 during the Great Recession vs. a normal level of starts of 1.5MM. The recession that was not caused by a housing collapse was the exception that proves the rule as that was the extremely shallow 2001 recession (-.6% contraction) that was precipitated by a collapse in technology investment as the tech bubble burst.
We continue to forecast that the US will stay out of a recession during this Fed tightening cycle as the US has a large housing shortage of up to 3MM homes and prices continue to rise slowly which stimulates builders to continue high levels of housing starts. Rising housing prices are a key leading indicator of inflation, but the recent rise in housing prices is modest and the decline in housing prices that started in July of 2021 has yet to be reflected in the deeply flawed BLS shelter cost estimate used to calculate CPI. Moreover, there are 440,000 new units of apartments coming online in 2024, and national year-over-year apartment rents are flat to down, providing downward pressure on the shelter component of CPI.
We continue to be bullish on both stocks and bonds for 2024 as we expect global rate cuts, particularly in the Euro Zone, to drive US treasury rates into the 3-3.5% range. At the top end of the range of our interest forecast (3.5%), the implied multiple on the S&P based on a discounted cash flow model is 20.5x which results in our 5,500 year-end target for the S&P (15% upside) based on 2025 estimated earnings of 270. We expect interest rate-sensitive sectors such as small-cap stocks, preferred stocks, financials, and REITs to outperform the S&P as rate declines continue throughout the year.
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