They say blood is thicker than water. Thus, it follows that DNA is stronger than the Federal Reserve.

Fed Chair Jerome Powell, in a June 21 speech, warned the markets that more rate hikes are coming as the inflation fight “has a long way to go.”

The stock market is due for a pullback after the frenetic artificial intelligence-driven rally it has experienced over the last few weeks. In a bull market, every pullback feels as if it’s the end of the good times. The pundits, and those who missed the rally, will be out in force to tell those of us with a bullish bent that they were right and the bearish trend is about to reassert itself.

They may be right. But then, they may be wrong.

That’s because bears and central banks can be shortsighted in their expectations and judgement. On the other hand, it’s difficult to argue with biology as in the genetically programmed behavioral changes in populations which are dictated by DNA and are triggered by specific stimuli.

These inherent and pre-programmed directives and their effects are especially evident when expressed by generational shifts related to aging milestones.

One such trio of milestones can be observed in the present as s baby boomers age, millennials reach the family formation stage, and Generation X and Z leave their parents’ basements.

In the present, this generational shift is accelerating and the housing market is in its crosshairs.

The Big Picture

The biggest influence on stock prices is the direction of interest rates, both from the Federal Reserve and the markets. Given its role as the creator of fiat money (money that is only backed by the governmental promise that it is legal tender), the Fed is by far the most widely followed purveyor of the direction of interest rates. When the Fed raises rates, the market’s respond. In the case of stocks, higher Fed rates usually lead to lower stock prices.

Yet, the most important market interest rates for the real world are those influenced by the yields of important treasury bonds, such as the U.S. Ten Year Note (TNX).

And it is the interplay between the Fed and the bond market and its effect on the ease with which money can be borrowed in the economy that eventually influences the direction of stock and tangible asset prices.

WATCH THIS VIDEO: The Fed and the Wisdom of Inaction

The Fed last week “paused” its rate hike cycle. Mr. Powell is telling us that more rate hikes are coming. The bond market is not fully convinced. At least not yet.

The Bears Have Been Wrong for Quite a While

The U.S. Ten Year note yield is arguably the most important of all the interest rate bellwethers in the world. That’s because TNX guides the direction of a large portion of mortgage rates, especially the commonly used 30-year mortgage.

The bond market’s recent action is certainly encouraging. Specifically, because the May consumer price index (CPI) and producer price index (PPI) figures suggested that the rate of inflation has flattened out, bond yields have rolled over.

In fact, until proven otherwise, the top in market interest rates was put in place in October 2022. Not coincidentally, the first half of the stock market’s double bottom, as measured by the S&P 500 index (SPX) occurred at the same time.

In other words, the bears have been wrong about interest rates, at least on the market side of the equation, and the stock market for nearly eight months, as I write.

I’m watching the reaction to Powell’s comments most carefully.

The Forgotten Winners and the New Wrinkle

My subscribers at Profit Catalyst Alert (PCA) have made our share of profits on the AI-related rally. But before that we were making steady gains in what remains a bullish and mostly ignored sector of the stock market, i.e. housing, specifically the homebuilder sector.

I’m fine with that because once Wall Street gets on the bullhorn about a sector, it’s often a sign that the big players are trying to juice prices in an area where they’ve built long-term positions and are looking to unload. I don’t see that in housing, just yet.

Meanwhile, it’s important to understand that anywhere from 11%-15% of U.S. gross domestic product is based on the combined activity of the housing market. Since the trend for mortgage rates is a key influencer of mortgage rates, falling mortgage rates, which boost housing, are thus an important influencer of the U.S. economy.

The price chart above shows the relationship between bond yields (TNX), mortgage rates (MORTGAGE) and the S&P Homebuilders sector (SPHB). Indeed, lower bond yields lead to lower mortgage rates and higher homebuilder stock prices.

The Generational Shift: Where Biology and Circumstances Meet

During the company’s recent earnings press release, Stewart Miller, executive chairman of homebuilder Lennar (NYSE: LEN), remarked that potential homebuyers have concluded that the “new normal” in mortgage rates is good enough. He added that “demand is strong when prices are affordable” and rates are reasonable. Lennar’s earnings beat expectations.

Pragmatic potential homebuyers have reached the point where mortgage rates south of 7% are good enough given the cumulative effects of their DNA calling, along with the other pressing factors in their lives. They’re making their moves.

What many investors are still ignoring is that even as homebuilders try to catch up on building new houses, the migration to the sunbelt is still ongoing. An interesting variation on the theme, however, is that baby boomers are downsizing and according to Bank of America are once again the driving force in the housing market, with Las Vegas, Phoenix, Tampa, and Orlando being their favorite destinations.

Meanwhile, millennials are looking for new homes and finding a limited supply of affordable and attractive options. They are opting to move to Austin (TX) in droves, while some are making their way to Cleveland, Dallas, and Tampa.

Finally, Generation X and Z folks are so priced out of the market that they are locking into rental leases.

Where the Money is Going

The upshot is that real estate investing, whether in homebuilders and related areas, or in the recently revived apartment and rental housing sector of the real estate investment trusts (REITs), is once again revving up.

A perfect example of where money has been flowing is homebuilder Meritage Homes (NYSE: MTH). Meritage specializes in building single family detached homes and townhomes in the sunbelt, with operations ranging from Arizona to the Carolinas, with Texas and Tennessee in the middle.

The company has proven to be quite adept at not only focusing on crucial high growth locations, but also in delivering what the market calls for via a mix of relative affordability and convenience. Of late it’s been specializing in detached townhomes with its latest venture coming to a key suburb of Houston.

Detached townhomes seem to be the latest go-to design for many who like roomy digs but don’t want the feel of an apartment which can often be present in the traditional attached townhome model.

Moreover, MTH is keeping prices relatively low, at $200,000 to $400,00 for the1,400 to 2,200 square foot floor plans which include two car garages and access to major conveniences such as retail and highly rated schools.

The stock has been in a steady uptrend since the October 2022 bottom and looks set to move higher in the current market.

On the other side of the spectrum is what is becoming a reborn rental market. That’s because those millennials are moving to Austin and Tampa, and those Generation Xers and Zers who finally decide to leave mom and pop’s basements will have to rent.

A great way to invest in apartment rentals in via a well-diversified exchange-traded fund (ETF) such as the Nuveen Short-Term REIT ETF (NURE). This ETF invests in companies which specialize in short-term property leases. The fund isn’t solely invested in apartments; it also includes self-storage and retail leasing companies.

But it does shift its holdings toward what’s working best at any one time. And right now, the apartment rental business is showing some improvement.

The price chart is showing signs of accumulation with the Accumulation Distribution Indicator (ADI) and On Balance Volume (OBV) turning up as money moves in. And as long as this ETF remains above its 50- and 200-day moving average, it’s worth owning, especially if you are patient.

Megatrend Revived

The stock market is currently overbought. Mr. Powell is promising a resumption of the Fed’s higher rate cycle.

The short term may be bumpy.

On the other hand, history is likely to show that the post-pandemic period, where a myriad of demographic and economic factors collided, may be momentous for real estate investors who recognize the presence of what can only be described as a megatrend.

Indeed, huge secular factors seem be accelerating in the housing market as the possibility of improving mortgage rates, tight supplies, and the development of an inexorable multi-generational shift in the population combine to create what is likely to be a long-term bullish trend for real estate investors.

While it may not always be a smooth ride, especially if the Fed throws a wrench into the proceedings by restarting its rate hikes, over time patient investors are likely to be rewarded by owning shares of homebuilder and related companies in addition to sub-sector specific real estate investment trusts.

If asked to choose between the Fed and the power of DNA, I’ll take the latter.

Editor’s Note: The stock market has been on a tear lately, but if you’re still nervous about risk, consider the time-proven advice of our colleague, Dr. Stephen Leeb.

As chief investment strategist of The Complete Investor, Dr. Leeb has produced a special report on how to survive the tectonic shifts facing the financial world.

Amid the upheavals he sees ahead, he says the most profitable investment opportunity won’t be found among conventional assets. His research indicates it will be a tiny under-the-radar play, as revealed in this report.

Subscribe to the Investing Daily video channel by clicking this icon: