Discoveries Will Be The Only Big Winners In This Soft Landing Summer

From the Maven Letter | July 27, 2023

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Here’s my tweet (are we supposed to say “my X” now?) from this morning.

It’s a subtle shift in stance from before. A few months ago, I said ‘soft landing’ was a useless term that just described more of the same stuck-between-good-data-and-recession-fear sideways action we’d been seeing for months.

Now ‘soft landing’ has become a real thing. There’s increasing conviction that we have actually landed softly: rate hikes and/or COVID bottleneck recoveries have pulled inflation down but growth, jobs, and spending have survived.

Good data has been around for months, but the difference that emerged in the last month is that investors now have some conviction in that data. And conviction means piles of cautious cash that had been sitting on the sidelines is now being invested.

June’s inflation numbers played a big role in setting up this new outlook. Headline inflation dropped to 3%, below the 3.1% expectation and hitting the upper limit of the Fed’s inflation target. Importantly, all the main components of inflation are now trending down: energy, food, goods, and services. If you recall, rising services inflation was a major concern until just a few months ago.

For inflation to fall to the top of the Fed’s target range is notable. It could certainly rise again, which is why the Fed isn’t letting up yet, as evidenced by yesterday’s unanimous 25-basis-point hike.

But the hike didn’t even cause a ripple in the markets. It feels like investors are finally facing two realities – surprising economic resilience and the Fed’s higher-for-longer-because-we-can’t-let-inflation-return. As a result, market bets on a cut don’t best 22% until next March and even then odds are almost event that we’ll still be at 5.25-5.5%.

It’s like we’re finally past the oh-so long period when traders wanted rate cuts above and beyond anything else. Which was weird, because most often central bankers only cut rates when the economy needs help.

Why did traders want that? Well, they didn’t want a weak economy but they had gotten so used to easy money driving an ever-rising stock market that they wanted money to get easier again, context be damned.

And so there was this longstanding ass-backwards assumption: that the Fed would hike us into a recession, which wouldn’t be great, but that they’d cut rates in response, which would be great because it would send new easy money flowing into the market.

That line of thinking drove me nuts. Thankfully, there is now a new rate cut dream: with inflation handled but the economy doing fine, the Fed will gradually cut rates just to keep a good thing going.

That new dream is apparent in the market no longer expecting rate cuts until March next year at the earliest: investors no longer think we’re heading into a recession. And that is letting market participants settle into what is happening (not what they think is supposed to happen), which is pretty good stability and growth, with employment rates that are strong but not so strong they stunt growth.

Bottom line: the role of rates has finally diminished. Yes, they are high. Yes, we will very likely still see impacts from that historic hiking cycle. But no, we don’t need rates to drop for things – the market and the economy – to work.

As that new reality sets in, investors should be able to invest in growth – not growth stocks but overall economic growth. It takes time for mindsets to shift, especially when the risk of recession down the road still lingers, so I don’t expect investors to flood into copper and iron ore tomorrow. But I do think a growing sense of confidence that this soft landing is real will slowly motivate money to invest for the future, rather than positioning for protection.

The benefits won’t materialize this summer. It takes longer than that for the market to change gears. So over this summer, I think the only metals and mining stocks that will really shine will be those announcing discoveries.

If things go well – if inflation does not perk back up, jobs remain strong, and there isn’t a preliminary-level catastrophe like a wave of insolvencies or an energy price spike – then investor interest in metals might build, lifting prices and re-rating valuations for producers and developers. But bumps in the road will bring recession fears back every time and there will be bumps, so I’m not banking on a rising tide in the next few months.

Instead, I’m leaning into stocks with discovery potential for the near term, while holding my favourite resource growers, project developers, and miners for the next phase. My focus on discovery potential for the near term is why I bought three lithium stocks recently – Targa, ISM, and Eureka – and it’s why I’m watching a few of my holdings more closely than the rest.

I run through those stocks with my subscribers. If you’d like to know the details, subscribe to the Maven Letter!

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