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As a big picture investment idea, you can’t do much better than Home Depot (NYSE:HD). As a hardware and home maintenance retailer, Home Depot is a needed commodity in any market, bull or bear. This resiliency underlining Home Depot stock has proven itself yet again during the novel coronavirus pandemic.
Sure, people flocked to Kroger (NYSE:KR) and Costco (NASDAQ:COST) stores when the coronavirus first struck and it made sense: you can’t live without food, water, and convenient hand sanitizer packages.
However, many of us – including yours truly – discovered that items that we necessarily can’t eat nevertheless play a vital role in our comfort and in a real sense, our safety.
Therefore, I haven’t been surprised that Home Depot stock has steadily marched higher since its March lows. But ahead of its second-quarter earnings report, it’s fair to consider the other side of the coin.
Yes, HD received a shot of relevancy during the peak of this crisis. As well, other potential crises – particularly the record-breaking hurricane season – should theoretically lift Home Depot stock. But back in March, people had more money to work with. As the coronavirus pandemic continues to exact a toll on our country, those collective funds have been negatively impacted.
Further, the deadlock in Congress about extending pandemic-related relief to millions of desperate Americans raise concern, not only for Home Depot stock but for other retail names. At one point, many workers were making more money staying at home than they did actually working. Surely, this supported consumer spending.
Now, without that vital support, a dark cloud hangs over the labor force. It’s not as if every HD customer is well off.
Unusual Housing Dynamics for Home Depot Stock
Obviously, with a name like Home Depot stock, the security moves on major developments in the housing market. In this case, HD generally moves higher when it’s a seller’s market. This makes sense because higher home prices indicate greater demand, which in turn benefits HD’s valuation.
Of course, this trend has its limits. If there is too much demand, meaning that inventory is constrained, the shift toward HD wouldn’t be sustainable. A classic example is the housing crisis which eventually led to the Great Recession.
Further, between 2012 to 2018, the price of Home Depot stock shared a strong direct correlation with the monthly supply of houses in the U.S. (which the government measures as the ratio of houses for sale versus houses sold). In other words, as home supply increased (to reasonable levels), so too did HD shares.
But from the beginning of 2019, we saw an abrupt change to this relationship. Instead of a direct correlation, we now have an inverse relationship: as one metric goes up, the other slides down. Nowhere is this new dynamic more evident than it is during this crisis.
Click to Enlarge
Source: Chart by Josh Enomoto
In April, the housing supply ratio jumped to 6.8, a multi-year high. At the time, Home Depot stock averaged $218.53. Jump ahead to June and the housing supply is down to 4.7 and HD shares traded at $249.
This tells me that demand for home furnishings, repair and remodeling is strong – with a dearth of inventory, what else are current homeowners going to do?
Looking back at history, until the housing supply ratio reaches unsustainable levels, perhaps at ratios seen during the last housing crisis, the bullishness in HD stock will likely continue. Again, there’s really nothing that prospective home buyers can do.
Divisive Politics Can Be a Surprising Catalyst
Still, the big wildcard is the economy. Unless the U.S. government can get its act together and present viable solutions, we may face a catastrophe. You only need to look at the rising prices of precious metals to understand the fear investors have.
As well, the political divisiveness isn’t helping matters. But on some levels, it’s a positive catalyst for Home Depot stock. Primarily, President Donald Trump has every incentive to throw anything and everything at the struggling economy. If it’s sickly by election day, he’s toast and he knows it.
On the other hand, Wall Street seems to have a love affair with the Joe Biden-Kamala Harris ticket. Thus, even if Trump loses, that could also be positive for HD stock.
Given the strange dynamics of the new normal, I’d say that Home Depot looks good into 2021. And even if disaster strikes again, it’s reasonable to have confidence in HD. It’s been proven reliable during the worst of times and hopefully, this pandemic should prove no different.
A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare. As of this writing, he did not hold a position in any of the aforementioned securities.