- Home improvement retailers are among the first to see a lift from the Fed’s rate cut.
- Share prices for Home Depot and Lowe’s are up, and spending on projects is expected to follow.
- “As rates come down, people will start to move more,” Fed Chair Jerome Powell said Wednesday.
The US Federal Reserve’s decision Wednesday to cut rates by half a percentage point has created a flurry of immediate reactions, but the real effects of the policy are likely to take several months to bear out.
Still, some areas of the economy are already seeing a lift in response to the news — and the fact that the Fed went with the larger of the two most likely options under consideration.
Home improvement retailers, in particular, are among the companies who were primed to come out of the gate strong with a rate cut, and, true to form, shares for Home Depot and Lowe’s were up as of Thursday’s market close.
“Home-related companies should soon see the beginnings of fundamental recovery exiting this year,” Mizuho analyst David Bellinger told Business Insider. “Aside from any initial noise in the market, Home Depot and Lowe’s should keep grinding higher as all this comes together.”
And while a rising stock price carries its own benefits for a company, the uptick is a signal of a much more important change still to come: sales.
Executives for both Home Depot and Lowe's have characterized their businesses as being constrained by low housing turnover and high borrowing costs, both of which are results of the Fed's tight interest rate policy.
Home Depot CFO Richard McPhail described his company's core customer as having "a deferral mindset" in spite of being in a generally healthy financial position.
In short, most big-ticket spending on home improvement comes from one of two places: people buying and selling homes and homeowners renovating existing homes with borrowed money. Unless they have to fix something urgently, a lot of folks have decided they're better off waiting to upgrade.
Fed Chairman Jerome Powell talked about the impact on the housing market in his remarks following Wednesday's announcement.
"The housing market is in part frozen because of lock-in with low rates. People don't want to sell their home," he said. "As rates come down, people will start to move more, and that's probably beginning to happen already."
What's more, Powell signaled in his speech that further cuts are likely if the data support them, which can encourage some of those sitting on the sidelines to go ahead with a new mortgage or credit line with the expectation that they can simply refinance in a few months when rates come down further.
Additionally, Home Depot and Lowe's have taken great care to manage investor expectations through the slumping sales and slimmer profits over the past year.
In particular, both companies continued to invest in their stores with the expectation that pent-up demand would eventually be unlocked. (Truist Securities analyst Scot Ciccarelli has referred several times to a "coiled spring" for the retailers.)
Max Rakhlenko, a TD Securities analyst, said in a note on Wednesday that Lowe's management was expecting a "phased recovery" in which homeowners start with smaller projects before getting more comfortable with larger ones that require tapping into their house's equity.
"We're aggressively working in this downturn," Lowe's CEO Marvin Ellison said during his earnings call last month, adding, "Whenever the macro inflection occurs, we just want to be ready to take advantage of it."
It appears Ellison may not have to wait much longer.