I like tracking Home Depot (NYSE:HD) stock given just how important housing is to the broader economy (and I like that they sell lumber!). That’s why its fourth-quarter earnings report is particularly interesting.
Home Depot reported a decline in same-store sales of 3.5% in the fourth quarter of 2023, with a notable 4% decrease observed within the U.S. market specifically. Yet, housing seems to remain strong. I say “seems” purposely here, because the decline in Home Depot’s sales does seem to suggest there’s a cooling of demand within the home improvement sector.
This downturn could be something… or it could be nothing.
What Home Depot’s Q4 Means for the Stock Market
Home Depot was a clear beneficiary of demand following the Covid-19 pandemic as people started home improvement projects during lockdown. So perhaps the slowdown is expected. When we look even deeper to Home Depot’s guidance, the company warned that for 2024, it anticipates only a 1% growth in total sales.
Clearly there’s a transition happening, and executives know it. CFO Richard McPhail commented on the receding home pressures seen in 2023 which should be bullish for housing and consumer demand. This perspective raises the question of whether these conditions are merely normalization following an extraordinary period of growth during the pandemic or if they signal a broader shift in consumer behavior toward more conservative spending habits. I suspect it’s more the latter.
It’s worth noting that higher interest rates, as part of the Federal Reserve’s rate hiking cycle, are clearly a big part of this, increasing the delay in new home improvement projects.
With borrowing costs rising, consumers are understandably cautious about taking on new debt for large-scale home improvement projects. This hesitation is compounded by the lagged effects of tighter monetary conditions on the economy, which can dampen consumer confidence and discretionary spending. As Home Depot’s CFO pointed out, the housing market’s neutrality in the short term, amid skyrocketing home values and decreased turnover, makes it hard for consumers to be confident in where they put their hard-earned money to work.
The Bottom Line
Why does any of this matter for you?
Because prolonged tighter monetary conditions could signal a more protracted period of weakness in the home improvement sector, which has all kinds of knock-on effects on the broader economy.
The Fed wants to see housing slow down and maybe even pull back prior to lowering rates, which is why any timeline around a rate-cutting cycle is difficult here. If that’s the case, there could be meaningful weakness to come, which in turn could cause broader volatility.
Either way, I still believe Home Depot matters more to the economy than Nvidia (NASDAQ:NVDA). Even though the stock market disagrees.
On the date of publication, Michael Gayed did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
