The stock market is sending mixed messages about the housing market. In a recent FindLeadingStocks report I published, I labeled it the great housing riddle. On one hand, housing stocks are up big in the past six months which bodes well for the housing market. Meanwhile, on the other hand, home improvement stocks are falling and lowering guidance. That leaves a lot of investors looking for answers.
On Tuesday, Home Depot gapped down 2% after the company reported earnings. The home improvement giant warned that annual revenue will fall for first time since 2009. Last week, Floor & Decor fell after reporting earnings. Meanwhile, a slew of housing stocks are up big in 2023 and some housing stocks are trading at new all-time highs!
That disconnect is creating a lot of questions for investors on Wall Street:
What will happen to the economy in the second half of 2023?
Is the consumer in trouble?
Will we fall into a recession?
If so, how deep will the recession be?
So on and so fourth.
Typically, housing stocks and home improvement stocks move in tandem. They tend to be highly correlated and they tend to serve as a good proxy for the overall health of the consumer.
Why This Matters?
The reason why this matters is because both housing stocks and home improvement stocks are dependent on the health of the U.S. consumer and the consumer makes up around 70% of GDP. These sectors are influenced by factors such as consumer spending, housing market trends, interest rates, jobs, and overall economic conditions.
Historically, there tends to be a strong correlation between housing stocks and housing prices. Over the years, I have observed that housing stocks tend to move first and then housing prices follow. For example, in 2000-2005 housing stocks soared after the Dot-Com crash. Then housing prices on Main Street followed. Then, housing stocks topped out in 2005 and began to fall. Shortly thereafter 2008 hit and the housing market imploded. By that time, the average housing stock had already fallen over 50-80% from its 2005 high.
Then, a few years later in late 2011-2012, housing stocks bottomed and began to rally for the next several years. Well, once again, housing prices on Main Street followed, and the rest is history. That’s why paying attention to housing stocks and home improvement stocks is so important because it gives us clues on what might happen on Main Street.
More Clues On The Health Of The Consumer: Other Retail Stocks
Housing stocks are one component but we also want to see how other retailers performed last quarter and what they will say for the rest of 2023. That’s why it is important to stay focused and pay attention to what the other big retail stocks will say when they report earnings later this week. We will know more by the end of the week, but if other large retailers echo Home Depot’s concerns, that could be enough to spark another (potentially big) leg down on Wall Street.
On the other hand, if the market absorbs this news and does not fall. That will be a very bullish sign and suggest that another leg higher may unfold. Remember, there is no “lock” on Wall Street. It is a big puzzle and the narrative continues to evolve as new “data” is released. Stay tuned, it is never a dull moment on Wall Street.
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