Higher for longer

(Hello. No, I didn’t ghost everyone. I’ve been busy doing college visits and basically ignoring the markets. But I’m trying to get better. A special hello to that nice finance professor in Greenville, S.C., who is a Motley Fool and FitsandStarts subscriber. Please mold a future generation to be more on top of things than I am.)

The big news is that we haven’t destroyed inflation. And suddenly it isn’t so clear that the Fed is going to cut four or five times in 2024.

Stocks reacted by freaking out. And, I mean, who could see this coming? It is not like this was obvious as far back as last June. Or last August. Or October. Or December, even.

As an aside, I really don’t mean that as spiking the football. Yes, the higher for longer view is proving to be correct. But if you read those posts today there is nothing profound in them (typical for me). It was the narrative that was in fantasy land. We can learn from that.

Higher for longer means money will not be free again any time soon. It means that companies that rely on debt, and companies that rely on customers who rely on debt, will remain sluggish for longer. It will mean that life for some companies will be miserable for a time, and that no CEO brilliance will be able to outthink the reality of the situation.

It will also create opportunities.

To wit…

We should pause here and say I am not telling you to run out and buy Walker & Dunlop. I do not pretend to be qualified to make stock recommendations, and I don’t know anything about your situation. I should further say that I do own this stock, and I have added to it at times, and I might add to it again. A lot of smart people I know hate Walker & Dunlop and think I’m insane for holding it. They could be right. You do you. WD is being presented here not as a stock pick, but as an example of a larger trend. Etc.

Walker & Dunlop is a lender, investment banker, and servicer to commercial real estate. It falls into the category of companies that rely on customers who rely on debt. Commercial has its own headaches to deal with without thinking about debt. Higher for longer makes things worse.

All of this is true.

But as we’ve discussed before, our best way to win an unfair game is to not play by Wall Street’s rules. Wedbush was playing the momentum game when it added WD to its best ideas list (believing as rates fall activity would increase) and is now playing the momentum game in downgrading and removing it from the list. This isn’t a commentary on the health of the business. It is a commentary on how the business is likely to perform over the next 12 months or so.

Retail investors often make the mistake of assigning emotions to analyst recommendations. A downgrade does not mean an analyst hates a stock. An upgrade does not make an analyst part of your cult of true believers. Recommendations are predictions about what will work now. As much as many analysts would like to focus on the long-term, their jobs require them to be laser focused on what happens next.

Jay McCanless, the analyst in question, is a smart guy who is doing his job. (Roll Wave!) His job isn’t to tell us where he thinks Walker & Dunlop will be as a business 10 years from now. His job is to predict where the stock goes in the near-term. And his logic here is sound.

Indeed, when he added WD to his best idea list four months ago it was not based on where he thinks the business will be in five or ten years. It was because he thought “increased transaction volume at the commercial and residential mortgage finance company would be in order should interest rates continue their downward spiral.”

I can’t tell you what stocks you should buy. But I can tell you that if you ignore the Wall Street focus on what happens right now and instead focus on what will happen over the long term, and invest accordingly, you will be just fine. And you will sleep better at night not worrying about what the markets might do tomorrow. It is much easier to sleep knowing the general direction markets have traveled over the last 10, 20, and 50 years.

I can’t tell you what will become of Walker & Dunlop. But I am pretty sure its destiny will not be determined by the duration of this rate cycle. And there are a lot of solid companies feeling the same impact right now, some offering massive dividend yields to those who are willing to climb aboard right now. Weak companies die when the cycle turns south, but strong companies consolidate and prepare for future growth.

Short-term markets don’t differentiate. That’s our opportunity.

Disclaimer: Fits and Starts DOES NOT provide financial advice. All content is for informational purposes only. Stocks mentioned are as reference only, and a mention should not be interpreted as a buy or sell recommendation. The author is not a registered advisor or a broker/dealer. DO YOUR OWN HOMEWORK. The information contained within is not and should not be construed as investment advice, and does not purport to be. The red zone has always been for loading and unloading of passengers. There’s never stopping in a white zone.

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