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That's right, I’m rooting for a recession – a statement that always makes people angry. But I hope loyal readers will hear me out all the same. As for anyone who’s new here, don’t go anywhere just yet. I’m not hoping you lose your jobs and end up out on the street. Far from it.

Those of you who’ve been with me for a while know I lost almost everything in the 2008 housing market crash. That’s not the kind of recession I want to ever see again. Not for me. Not for anyone.

I had five children at home back then, two of them under three and one still in diapers. And my wife wasn’t working, which made me the sole breadwinner for the family.

That was perfectly fine when my commercial real estate (CRE) development business was going gangbusters and I was making rent from additional properties I owned. But when all that went up in smoke, I found myself with two very tough options:

1. Give up completely
2. Rethink my entire career

There were times I seriously contemplated the first route, and the second involved a long, hard journey with plenty of frustrations. Although my results are definitely worthwhile, I wouldn’t wish that level of stress on anyone.

So, no, I’m not hoping for that kind of recession. But a garden-level recession – the kind that actually sets us all up for bigger and better things? Sign me up for that right now. I’m already on board. Here’s why.

It’s Getting Out of Control

Nobody wants to talk about it, but the U.S. stock market is – by many historical metrics – overpriced, and getting worse every week.

There are numerous ways to assess stock market health, but a big one is the trailing price-to-earnings (P/E) ratio. This calculation takes a current stock’s price and divides it by the last 12 month’s earnings per share (EPS).

It can also be applied to a collection of stocks, which is why we know that the S&P 500’s historical mean is 15x. Today, though? It’s trading nearly double at 28x. That’s not quite as high as the reading from previous bulls. The same figure was 36 and 46 in 2020 and 2000, respectively. But that doesn’t make this market a bargain.

Bulls can argue all they want that this is justified, but that discrepancy is significant nonetheless. And having suffered the way I did through one bubble bursting, it makes me more than a little concerned about what could happen from here.

I’m not saying a crash is imminent, mind you. Macro valuations can and have stayed elevated for years. But the more out of balance the market’s valuation gets, the worse the correction will probably be.

Regardless of the intensity, there will be a correction. Every bull market ever has been followed by a bear market. Just like every bearish period ends as the bulls start running.

Nothing ever goes up in a straight line. There are always corrections -- and there should be. Corrections bring stock prices back into balance, making them much more affordable with much bigger profit potential.

To quote Fortune magazine on the subject from earlier this week, “The science tells us that when you’re starting at these big prices, you’ll get pocket poor returns over the next seven or even five years.” That doesn’t sound worthwhile to me. And it shouldn’t to you either.

Incidentally, the article, titled “On Wall Street, bearish investors are out of favor – but there’s mounting evidence they are right about the stock market,” concludes that, while “the bulls could be right” for a while longer, “the more the market booms, the more it sows the seeds of its own demise.”

Again, a little short-term discomfort is fine by me – even preferable – if it means longer-term gains after the fact. And there’s one more reason why bad economic news could be good investing news in the years ahead.

Rate Cuts Are Coming, But...

A recession also means the Fed will cut interest rates more aggressively. That is, after all, part of its mandate. And with inflation readings coming in cooler, the Fed will have the cover it needs to ease monetary conditions.

For the record, I’m still saying we’ll see two rate cuts this year. The first one will likely be in September.

Federal Reserve Chair Jerome Powell can say he needs to see more “data” first until he’s blue in the face. As he told the Senate Banking Committee on Tuesday, he’s still concerned about cutting rates too early. But it’s going to happen one way or another.

As I wrote on June 18, “That’s because there’s an election coming up. A presidential one.” And, like it or not, sitting presidents “have a long and colorful history of ‘incentivizing’ their Fed Chairs.”

There’s also the fact that June’s job numbers came in as expected at 206,000. There were no surges or surprises there, as happened earlier this year. Moreover, April and May’s numbers were revised downward by 111,000, a further indication of a cooling economy. And Powell noted “modest” progress in taming inflation as well. Mark my words, he’ll get bolder about those positive points soon enough.

Admittedly, I don’t expect he’ll cut by too much. Probably 0.25 basis points both times.

But if we had a nice little recession, it would give him much more credible ground to stand on in this regard. And that, in turn, would give businesses greater incentives to grow – including my favorite category of publicly traded companies: real estate investment trusts (REITs).

The Last Shall Be First and the First Last

It’s a truism that leading sectors rarely stay that way forever. And, more often than not, laggards in one year tend to outperform in subsequent years. Just look at energy.

In 2020, the S&P 500 energy index was the worst-performing sector, down about 33% that year. That hurt, no doubt about it. But it also gave investors the chance to pick up premier energy assets at wonderful prices.

And wouldn’t you know it? The energy index was the top performer in 2021 and 2022, with 54% and 65% returns, respectively. And as I survey the landscape, I can’t help but believe that premiere real estate assets are trading at near-bargain levels.

Real estate investment trusts, as a whole, are still operating with strong balance sheets but less-than-impressive valuations. In short, unlike big tech players, most of these stocks are undervalued.

For instance, here’s what we said about VICI Properties (VICI) – the owner of premier casino properties in Las Vegas – on Monday:

"[T]his company owns the majority of the properties along the Strip.

"VICI dominates Las Vegas with 660 acres of land, more than 41,000 hotel rooms, and nearly 6 million square feet of conference center, convention, and trade show space in the city.

"...VICI collected 100% of its rent throughout the pandemic. I can’t think of another company that achieved that level of success (other blue chips, such as Realty Income or Agree Realty, which are in our model portfolio, collected 95%+ of their rents… but not 100%).

"Today, VICI trades for just 12.6X AFFO. That’s well below its 16.2X average since its 2018 IPO.

"Higher interest rates are the culprit for this sell-off. Investors fear that higher rates are going to hurt VICI’s profitability. But we aren’t seeing this fear turn into reality.

"As I already said, VICI has a perfect annual AFFO growth rate streak. This year, we expect for that to continue, with an AFFO growth outlook of roughly 5%. Furthermore, we expect to see VICI continue to compound its bottom line at a mid-single-digit rate throughout the next three to five years (at least)."

REITs are seen as very interest-sensitive vehicles since they’re so reliant on borrowing – to the point where investors ignore everything else. Safe, secure, and growing businesses suddenly mean nothing to them under elevated rates.

That will change. With or without a recession, rate cuts will mean investors take a second look at REITs. But a garden-style recession? Things could get very interesting.

That’s why I’m rooting for a downturn from here. The long-term benefits would be too good to pass on.

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