Home Depot Says What We Want to Hear, Inflation Data, and an Overbought Plan
Here's why this major homebuilder boosts our confidence in several Pro Portfolio holdings; also here's how we're viewing looming economic data, the market.
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Let's take a look at comments from Home Depot HD and what they say about several Pro Portfolio holdings; at the expected inflation data; at our strategy for an overbought market; and at appointees by incoming president Donald Trump.
Home Depot Give Us Confidence in Four Holdings
Home Depot HD posted 6% sales growth for its latest quarter, noting that it benefited from hurricane-related repairs, as well as warmer, dryer weather. That comment supports our views on post-Hurricane demand for United Rentals URI, Vulcan Materials VMC, Builders FirstSource BLDR, and Waste Management WM.
But this comment from CFO Richard McPhail, made an even bigger impression on us: “Our customers tell us that their lives are changing. Their families are growing. They’re upsizing, they’re downsizing. They need to move for a job. There is demand for remodeling, and they are putting it on hold until they see a more favorable financing environment. And so the demand is there, the question is when it’s unlocked.”
That comment speaks to our believe that as the Fed brings monetary policy back to a neutral footing, lower mortgage rates should drive a rebound in housing activity.
Prepping for October Inflation Data
October consumer price index and producer price index reports will be published tomorrow and Thursday morning, respectively. Several Fed officials will also speak early this week; odds are they will largely reiterate Fed Chair Jerome Powell’s recent comments. The same is likely true when Philly Fed President Patrick Harker speaks at 5 P.M. ET today.
We believe Fed speakers starting tomorrow through the end of the week will be far more constructive about what’s next for Fed-rate cuts. That goes double for what Fed Chair Powell will say Thursday afternoon. We say this because the October inflation data will be published as will the October retail sales and industrial production data. The core inflation figures will tell us if the upward trend seen in recent data has abated; if not, that data would suggest the Fed may have some serious thinking about its December policy meeting.
The market has dialed back expectations for rate cuts over the coming quarters, now seeing four quarter-point rate cuts being delivered by the end of 2025, down from that many by mid-2025. What’s in play, however, is whether the Fed will cut interest rates again in December after delivering three-quarters of a percentage point in cuts between its September and November policy meetings. As of now, the CME FedWatch Tool shows the market pricing in a 69% chance the Fed will deliver yet another rate cut, but even that percentage has slipped over the last few weeks. We’ll be keeping an eye on 10-year Treasury yields as that data is published and Fed speakers make the rounds.
Overbought Strategy
Potentially setting up the next few days, strong moves in both the S&P 500 and the Nasdaq Composite since the 2024 presidential election outcome, including yesterday’s record close for the S&P 500, have those indicators bumping up against overbought territory. At the same time, the Volatility Index (VIX) has fallen to levels we haven’t seen since July. While we could see the market ultimately trend higher in the balance of the year as seasonal strength prevails, it wouldn’t take much for traders and investors with short time horizons to take some profits off the table just like we did last week. At times like this, they may not need a reason so much as an excuse.
That is one of the reasons why even though shares of some holdings, like Universal Display OLED and Qualcomm QCOM, have traded off in the last few days, we are standing on the sidelines.
For now, we’ll rekindle our Portfolio shopping list as well as we revisit several price targets, including those for United Rentals URI, ServiceNow NOW, Morgan Stanley MS, and some others that are nearing our target prices.
As we do that and put more distance from Election Day and President-elect Donald Trump appoints cabinet positions, we suspect the market will soon focus on Trump’s economic policies and what they could mean for inflation and Fed monetary policy. Reports point to Trump nominating China hawks U.S. Sen. Marco Rubio and Congressman Mike Waltz for secretary of state and national security adviser. Candidate Trump pledged to aggressively use tariffs, but whether those campaign trail promises are negotiating tools or become enacted policy will be determined in the coming months. We keep watch and respond accordingly.
At the time of publication, the Pro Portfolio was long VMC, URI, BLDR, WM, NOW and MS.
