The Home Depot-Bernanke disconnect
The home improvement company believes the housing market is recovering, but the Fed chief isn't so sure about the economy.
Federal Reserve Chairman Ben Bernanke testified on Wednesday in front of Congress explaining that the Fed may or may not rein in quantitative easing in upcoming sessions, based on the future economic situation. That brought a much needed pullback to equity markets, and introduced further uncertainty over the state of the economy for the rest of 2013.
Meanwhile, earlier this week, Home Depot (HD) released strong earnings and raised its outlook. The company believes that the housing market, if not the entire economy, is on the rebound.
The first chart below is of Home Depot over S&P Equal Weight ETF (RSP). The pair shows the relative strength of Home Depot versus equity markets over a two-year span.
Home Depot has seen a large uptrend during the housing recovery. Beginning this year, however, the pair has traded sideways.
As housing data and unemployment have been mixed, the pair has fluctuated within a range. As the economy continues to pick up steam, albeit at a gradual pace, the pair should see a breakout of its range.
The next chart is of SPDR Homebuilders ETF (XHB) over S&P Equal Weight ETF. The chart reiterates what was seen above.
The housing recovery has helped cyclical companies that cater to the housing industry, and housing has improved along with employment. Individuals are more flexible to buy and sell houses in order to move in between cities that offer the best job prospects. When prospective employees were unable to sell their properties for reasonable prices, they were more likely to stay put and accept wages or jobs below their capabilities.
The next chart represents the Treasury 30-year rate. The Federal Reserve has enacted unorthodox measures in order to drop rates and spur long-term investment.
The rise of Home Depot and the housing market has fallen in stride with 30-year rates and the accumulation of mortgage-backed securities by the Fed.
With Bernanke reiterating on Wednesday that a change in policy would add instability to markets, it looks like rates will stay suppressed for the better part of 2013, maybe into 2014. That could play a part in Home Depot projecting a rosier outlook than had been expected.
The last chart below is of the U.S. Non Farm Payrolls figure. Employment leads to a stronger consumer, and a stronger consumer has more capital to purchase housing. The virtuous cycle affects all economic indicators.
The chart below shows that growth has picked up, even though it remains slow. When the pair can surpass the 300,000 monthly average of job additions, the economy should begin to pick up even more steam. As the core fundamentals of the economy continue to improve, housing should as well, and cyclical companies like Home Depot should break out to record highs.
At the time of publication the author had no position in any of the stocks mentioned.
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