This week, the prospect of a recession got real. Scary real.<\/p>\n
Nearly six months into the stock market\u2019s tumultuous ride, investors woke up Monday to see the claws of the bear now too late to duck: 40-year-high inflation for six months and the prospect of a quick spike in interest rates to tame it.<\/p>\n
The S&P 500 fell into a bear market, defined as a 20% decline from its peak, and fell further Tuesday. Meanwhile, the 30-year fixed mortgage crossed the 6% threshold for the first time since 2008, sending mortgage applications in May to a 22-year low.<\/p>\n
\u201cFederal Reserve policymakers will continue to aggressively combat inflationary pressures,\u201d said Anirban Basu, chief economist for the Associated Builders and Contractors in a statement<\/a>, forecasting a recession later this year or next.\u00a0<\/p>\n An ominous confirmation: The yield curve for government bonds \u2014\u00a0the difference between interest paid on 2-year and 10-year Treasuries \u2014\u00a0is getting closer to bending in the wrong direction, a widely recognized signal of an impending recession.<\/p>\n While the blood ran thick on Wall Street \u2014\u00a0495 of the S&P’s 500 underlying stocks ended lower Monday \u2014\u00a0nonresidential construction companies could be a safe haven against broader economic headwinds.<\/p>\n For instance, while the S&P 500 has lost 22% this year, the ISE Global Engineering & Construction Index, which tracks 56 large, multinational construction companies<\/a>, has lost about half that \u2014 12%.<\/p>\n There are several reasons these firms may show resilience in the face of a broader sell-off and sagging economy, including new project pipelines worth billions and plenty of future prospects to bid for in the $1.2 trillion Infrastructure Investment and Jobs Act.<\/p>\n And multi-year projects lead to \u201clate cycle\u201d profits in a downturn. Many key players, like AECOM and Jacobs Engineering, are pivoting to a less-risky business services model and away from the uncertainties and vagaries of physical construction.<\/p>\n To be sure, interest-rate sensitive sectors, such as income-producing properties, are likely to take hits. But on the nonresidential construction side, observers see reason for optimism.\u00a0<\/p>\n \u201cIn the headlines, we’re hearing more and more talk about recession risk,\u201d said Sean Eastman, senior equity research analyst at financial services firm KeyBanc Capital Markets. \u201cMeanwhile, most of the engineering and construction companies I cover just reported record or near record backlog levels in the first quarter.\u201d<\/p>\n The ABC\u2019s Construction Backlog Indicator<\/a>, which measures jobs contractors have won, but not started, hit nine months on Wednesday, the highest since September 2019 \u2014 before the pandemic and when commercial construction was near its peak.<\/p>\n \u201cIt is simply remarkable that contractors continue to add to backlog amidst global strife, rising materials prices and ubiquitous labor force challenges,\u201d said Basu. \u201cBacklog is up in every segment over the past year.\u201d<\/p>\n The firehose of infrastructure funding, which has just started to pump and will continue for five years, gives observers plenty of evidence that nonresidential construction firms could weather a recession.<\/p>\n \u201cI’m still bullish on construction \u2026 Public construction spending, at least, is likely to hold up even if the economy slows dramatically,\u201d Ken Simonson, chief economist at the Associated General Contractors of America, told Construction Dive.<\/p>\n Their stocks could be safer bets for investors trying to shed risk, especially construction and engineering firms with more public infrastructure business.<\/p>\n \u201cThe growth prospects are a little bit more locked in and are not as uncertain in a market that’s looking for a safe haven,\u201d said Andrew Wittmann, senior analyst at financial services firm Robert W. Baird.<\/p>\n While many would like to forget the Great Recession that hammered the housing sector, profits in commercial construction were buffered longer because of the long lead times and government contracts.<\/p>\n \u201cHousing crashed around 2006, but nonresidential construction on the private side kept going right up until the fall of 2008,\u201d AGC\u2019s Simonson said. \u201cEven then, public construction kept going for a year after that, because those were pretty long runway projects.\u201d<\/p>\n The big players also cover a lot of ground.\u00a0Take Granite Construction, based in California. While the company is a roadbuilder at its core, the firm has posted big gains in its aggregate business \u2014\u00a0selling things like asphalt and other materials needed for construction \u2014\u00a0during the pandemic.<\/p>\n Others say these companies\u2019 strengths lie beyond just a business cycle strength,\u00a0at least this time around. The reason why is because companies like AECOM, Jacobs and Fluor are diversifying into more stable, higher-margin work like government services.\u00a0That helps compensate for cost overruns on fixed-price contracts that erase profits.<\/p>\n \u201cThey\u2019re a little more resilient than they were a few years ago,\u201d said Krzysztof Smalec, an equity analyst on the industrials team at investment research firm Morningstar.<\/p>\n Nevertheless, some pundits see plenty of risk in these stocks. CNBC\u2019s Jim Cramer, for example,\u00a0recently panned Fluor<\/a> in his \u201cLightning Round\u201d stock-picking segment. \u201cUnder no circumstance do you want to buy Fluor,\u201d Cramer said. \u201cThat business is way too hard.\u201d<\/p>\n But KeyBanc\u2019s Eastman argues that view disregards the secular changes these companies have made in recent years. He says the upside of their new approaches has yet to play out.<\/p>\n \u201cThese businesses have become considerably more predictable, and I feel like we’re able to forecast out a lot further than we could have previously,\u201d Eastman said. \u201cThat adds another layer of contrast. We haven\u2019t even really seen the tailwind from the Infrastructure Investment and Jobs Act hit these models yet.\u201d<\/p>\n That said, the outlook certainly isn\u2019t rosy for all sectors of construction. For one, rising interest rates will almost surely have brutal impacts, especially for properties that collect rent.<\/p>\n \u201cI’m stunned to see how much the 30-year fixed mortgage rate has gone up just today so far,\u201d said Simonson on Monday, when rates jumped to 6.13%, a nearly 30-basis point leap in a single day, and double the rate six months ago. \u201cThat\u2019s clearly a danger sign for home building and for any income-producing property type. Apartment construction, hotel, retail and office, to the extent that those were coming back, and it’s hard to tell if they were, are all certainly vulnerable.\u201d<\/p>\n Basu added that supply chain and inflation worries will continue to plague contractors, no matter what sector they work in.<\/p>\n \u201cFor contractors, the challenge will continue to be the cost of delivering construction services,\u201d said Basu. \u201cThe risk of severe increases in costs and substantial delays in delivery remains elevated given the volatility in input prices, the propensity of the labor force to shift jobs in large numbers and equipment shortages and delays.\u201d<\/p>\n But for shares of large, public-facing nonresidential contractors, the bear market may be just the makeover they need to transform into Wall Street darlings at last.\u00a0<\/p>\n This item was originally posted here: Read More<\/a><\/p>","protected":false},"excerpt":{"rendered":"