Home improvement giants Home Depot (HD, Financial) and Lowe’s (LOW, Financial) have been on steady uptrend since the recession thanks to the slow but steady gains in the housing sector. As retail companies started posting mixed results, with some doing well and some doing poorly, the state of the economy became a huge unanswered question.
There are no fears of a recession per se, as the global economy is still expected to keep its slow expansion pace, but the U.S. posted lower-than-expected figures. The United States’ second quarter gross domestic product came in at 1.2% while the market was expecting a 2.1% growth.
The biggest problem is that, compared to 2014-2015 period when GDP kept expanding in the above 2% range, the growth has contracted to the below 2% range and it has been slowly coming down over the last several months.
“In the United States, first-quarter growth was weaker than expected, triggering a downward revision of 0.2 percentage points to the 2016 growth forecast. High-frequency indicators point to a pick up in the second quarter and for the remainder of the year, consistent with fading headwinds from a strong U.S. dollar and lower energy sector investment.” - IMF
The bad news is that before the second quarter numbers came out, the International Monetary Fund had already downgraded its U.S. forecast for 2016 by -0.2% points. In the second quarter, GDP for the U.S. grew well below the expected numbers, which means the forecast could be lowered yet again.
The effects of this slower-than-expected expansion can already been felt in the housing market. Sentiment is always the first casualty of a slowdown, and when investor mood is dampened, investments also cool off.
Private Residential Investment, one of the indicators of the housing market’s health, has grown from the low of $365.6 billion in 2010 to $702.4 billion by the first quarter of 2016, before dropping to $697.8 billion in the second quarter.
Source: FRED
The auto market is also going through a phase of correction after it reached its highest levels in 2015. Thankfully it didn’t come crashing down, but it did start moving sideways, and if the economy keeps expanding at such a slow pace then the housing market could also start moving sideways.
Obviously, that would create additional pressure on home improvement companies such as Home Depot and Lowe’s.
Nobody is expecting a recession, but it's clear that we are possibly looking at a period of slow growth during the next few quarters. Home Depot and Lowe’s practically control the home improvement market, and both have proved their resilience in the last decade. If their earnings drop, it could bring the stock price down along with it. If that happens and if you are a long-term investor, you won’t find a better time to add this duopoly to your investment basket.
Disclosure: I have no positions in the stock mentioned above and no intention to initiate a position in the next 72 hours.
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