As we look at 2024, we’re expecting to see both the M&A and housing markets recover. The scope of that recovery will be influenced by global macro factors, including supply chain protectionism, and inflation rates, particularly if rates lower as some believe they will. We also expect that inflation will continue to be a top focus for investors, as many consumers seem to be less willing to accept profit margin expansion (in the form of higher prices) than they were during the pandemic. We take a deeper dive into these issues below.
U.S. Steel agreed to be acquired by Nippon Steel
2023 was a slow year for M&A with total deal amount below $3 trillion for the first time in a decade. However, as bond yields peaked and stock markets broadened out towards the end of year, the M&A market suddenly awakened. On December 18th, U.S. Steel, an iconic American industrial company with a storied history, announced that it agreed to be acquired by Nippon Steel, Japan’s biggest steel producer for $14.1 billion in cash, shocking the market and Washington DC.
At a little over $14 billion, it was not a huge deal and did not even rank among the top ten M&A deals in 2023. However, it is a good deal for U.S. Steel shareholders if completed. At an acquisition price of $55 a share, it is nearly 40% higher than its previous day closing price and nearly 60% higher than the $35 a share that Cleveland-Cliffs, a U.S. steel company, offered to buy the firm in the summer.
Steel manufacturing is a struggling commodities business in the U.S., so antitrust issues seem unlikely. However, the deal has two major hurdles to clear—labor union approval and national security. U.S. Steel workers are heavily unionized and they have already expressed their doubts about the deal, including lack of communication to them during deal negotiation and anxiety of foreign ownership. Additionally, the deal needs to be approved by the CFIUS (Committee on Foreign Investment in the U.S.). Even though Japan is an ally country, steel manufacturing plays an important role in national security and the nation’s supply chain. The deal will also test touchy issues such as protectionism and “friend-shoring.”
The M&A market is expected to have a strong recovery in 2024 and how the issues surrounding this deal are handled will have a significant impact on the market.
Rate cuts may thaw a frozen housing market
A recent decline in mortgage rates coupled with a 2024 outlook for lower rates from the Federal Reserve may prompt lower long-term rates and a resurgence of activity for a currently frozen housing market. The U.S. real estate market has had an interesting cycle over the past few years. It began extremely hot with many all-cash deals. From 2020 through much of 2022, buyers paid well above asking price, often with no inspections as a shift towards work-from-home led to larger suburban residences. Many of these buyers were able to lock in record low mortgage rates, many of those below 3%. Within less than a year, the market shifted and there was a massive slump in real estate activity in 2023. Mortgage rates began to climb in response to the Federal Reserve increasing the Fed Funds rate, to combat multi-decade high inflation.1
As average mortgage rates reached nearly 8% in October 2023, their highest level in two decades, real estate activity ground to a halt. U.S. pending home sales activity fell to their lowest level in 20 years in October. A reading of existing home sales declined to their lowest level since August 2010, when sales fell due to an expiration of a federal tax credit for homebuyers. 2023 marked one of the lowest activity years for housing in the past few decades.2
While there are several likely causes of slowing housing activity, much of it does center around mortgage rates. A higher mortgage rate will add hundreds, and in some cases thousands, to buyer’s monthly payment, pricing many buyers out of the market. Despite the slowdown in activity, prices have not declined much and many predict they will not return to pre-pandemic levels. Inventory is also an issue; potential sellers are staying put as they don’t want to lose their prized low mortgage rate. This has driven many potential home buyers to rent as a long-term plan, creating the rise of the “forever renter”, many with higher incomes not typically seen in the rental market. A recent study from CBRE, comparing renting versus buying, found that the average monthly new mortgage payment was 52% higher than the average apartment rent, marking the worst time to buy vs. rent.3,4
With an improvement in the inflation picture, the Federal Reserve now expects the likelihood of three rate cuts in 2024, which may ignite a spark in housing. An even rosier picture came from the rates market, as they priced in six cuts. The lower rate outlook caused the average mortgage rate to decline near 7%, helping to boost optimism around housing in December. Risk assets did especially well in Q4 and in December. Perhaps the housing market freeze experienced in 2023 will thaw out amid lower rates in 2024.
Are outsized profits to blame for inflation?
The act of companies increasing prices more than needed to protect margins from higher input costs and its contribution to inflation has been an increasingly controversial topic. This so-called “greedflation” or, in other words, price gouging, has come into the forefront of discussions as the latest numbers from the U.S. Bureau of Economic Analysis showed total corporate profits in the third quarter grew to near-peak levels, while core inflation remains close to 4%.Yet, many argue that these for-profit organizations are functioning as intended and it is the myriad of other factors to blame, such as structural changes, immigration restrictions, rise in blue collar wages, and supply chain deglobalization to name a few.
Ultimately, many economists believe that the pandemic and resulting fear, scarcity, and confusion among consumers about where prices should be meant that they briefly became more accepting of above-cost price increases. This allowed some businesses to increase prices above expectations, such in the second-hand automobile market, for as long as consumers were willing to pay—which turned out to be a lot longer than anticipated. This practice seems to finally be coming to an end as buyers have started walking away and prices are slowly coming down across many sectors. However, softening margins so far appear to be largely confined to manufacturers. In the services sector, prices have barely slowed, reflecting the continued desire for consumers to prioritize life experiences and activities that the pandemic had once denied.5
This renewed unwillingness for consumers to support profit margin expansions is good news for central bankers, who have been working across the globe at one point or another to combat rising prices spurred by the pandemic.6
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