Why are US developers struggling since the Fed started cutting rates?

 The single-family home construction sector has been one of the worst performers on the US stock market over the last six months. This trend may seem counter-intuitive, as it coincides with the Fed's first rate cut, which is generally a positive signal for credit, particularly mortgages. It's an excellent illustration of the "sell at first drop" phenomenon.

In the collective imagination, stock market cycles closely follow economic cycles. But the reality is quite different. Investors are always looking ahead, adjusting their strategies according to expectations, not facts. This dynamic explains why markets rise or fall long before economic events materialize.

In the stock market, it is often said that "markets buy rumors and sell news. This perfectly illustrates the way the financial world works, where asset valuation is based less on the current situation than on future projections. So, when investors expect a favorable event - such as a fall in interest rates - they take positions in advance, propelling prices upwards. Once the event has occurred, logic dictates that the upside potential has already been exploited, which sometimes leads to corrections.

The "sale of the first fall" phenomenon

A concept well known to professionals illustrates this logic: the "sale of the first fall". This mechanism is particularly visible in sectors sensitive to monetary policy, such as real estate or consumer discretionary. The example of residential construction in the United States in recent weeks speaks for itself.

Over a three-year period, all players have posted strong growth. The leaders are also up year-on-year. However, the last few months have been more complicated. All companies have underperformed the S&P500 (+7.2% over six months), with serious setbacks for DR Horton and Lennar, the two biggest companies in the sector.

Let's look at DR Horton's performance against the 10-year US government bond. The bond's low point in September corresponds to the Fed's double rate cut. From that point on, the homebuilder's stock suffered. This is an illustration of selling on the first drop. However, this does not mean that the two curves will remain inversely correlated.

https://www.marketscreener.com/news/latest/Why-are-US-developers-struggling-since-the-Fed-started-cutting-rates-48834219/