Are Homebuilders Due for a Recovery or Continued Pain?

The real estate market was red-hot for years, as Americans could get mortgages for next to nothing. But as rates have risen, home buying has slowed mightily. Homebuilders have been some of the hardest-hit stocks as a result of the rising interest rates, and the majority of homebuilding and construction ETFs are in bear market territory—which means they are down more than 20% from their highs.

While some observers might believe the hard-hit homebuilder stocks represent attractive long-term investments today, the continued threat of rising interest rates could very well send these stocks even lower. If the Fed were to come out and announce a slowdown to its rate hikes, we could see investors move back into these names. But until such a time, these names appear to be untouchable. Even with new home starts still doing okay, the theory is that rates will choke the cycle off. Look at the carnage in these names.

Source: Yahoo Finance. Past performance is not indicative of future results. For standardized performance, click here.

So, maybe we need to look outside the United States.

As major US stock indices have been hitting new all-time highs in 2018, indices in emerging markets have lagged. You can see this trend in the year-to-date gain of 10% for the Direxion Daily S&P 500 Bull 3X Shares (SPXL) compared with the massive year-to-date loss of 50% for the Direxion Daily MSCI Emerging Markets Bull 3X Shares (EDC).

If you think the United States is poised for a pullback, selling the outperforming US indices and transitioning into emerging markets could produce the highest returns. Investors can gain exposure to emerging markets with the Direxion Daily MSCI Emerging Markets Bull 3X Shares (EDC) that we mentioned above, or they can pick a specific emerging market, such as the Direxion Daily FTSE China Bull 3X Shares (YINN), the Direxion Daily MSCI India Bull 3X Shares (INDL), the Direxion Daily MSCI Brazil Bull 3X Shares (BRZU), or the Direxion Daily MSCI Mexico Bull 3X Shares (MEXX).

Here is how the SPXL has fared versus EDC, YINN, and MEXX. Look at those gaps.

Source: Yahoo Finance

Emerging markets have lagged the United States in 2018, and China has been one of the weakest performers. Chinese markets are down more than 25% year-to-date. Tariffs have caused the Chinese economy to slow, and there does not appear to be an end to the pain in sight. Even though the correction is warranted, the Chinese market is trading at valuations not seen in years, and it may finally represent a risk-to-reward that is far too great to pass up.

Investors could choose to pick individual stocks to gain exposure to China or take a more diversified approach by selecting an ETF, such as the Direxion Daily FTSE China Bull 3X Shares (YINN). On the other hand, investors who are bearish on China could short individual stocks or go with the Direxion Daily FTSE China Bear 3X Shares (YANG).

The United States–Mexico–Canada Agreement (USMCA) will soon officially replace the North American Free Trade Agreement (NAFTA), and while the USMCA is much better for the United States than NAFTA ever was, it’s not all that bad for Mexico either—especially when it comes to Mexican auto workers. USMCA requires at least 40% of auto components to be made by workers who are paid at least $16 per house by 2023, which is more than three times Mexico’s current minimum wage of under $5 for an entire workday.

Even though it will cost more for companies to manufacture in Mexico, it will still be less expensive than manufacturing in the United States. The increased pay for Mexican workers will likely help Mexico’s economy since there will be more disposable income than ever before for these workers. For these reasons, the Direxion Daily MSCI Mexico Bull 3X Shares (MEXX) may be one of the more attractive emerging markets for investors looking to diversify internationally.

Are the opportunities in the United States or across the globe? And will these trades continue or reverse? It’s tough to say with clarity. But as usual, Direxion has you covered—whatever your view, wherever in the world you want.