In 2013 we added Home Depot (HD) to our portfolios as builders were re-engaging their development projects following the 2008 Great Recession.  Homeowners were also increasing their spending on their homes either preparing them to sell or doing the long-waited upgrades on their current home.

Since June 2013, HD has increased a cumulative 322% for an annualized compounded return of 15.58%, outperforming the S&P 500 by almost 100% during this period.

I don't know about you, but I love going to Home Depot.  This past Sunday, my son-in-law, who is a contractor, and I were up early, and we went to Home Depot to walk around… for fun!  Home Depot is to men like Sephora is to women. Home Depot speaks to our love language. 

After the 2020 pandemic and new remote work policies, homeowners started spending at greater levels at Home Depot to finally get those projects done since one or more of the parents is now working at home.  After the volatile selloff in early 2020, Home Depot stock price rebound 120% from its March 17, 2020 low and by December 31, 2021 it had a two-year rally rising 90.04%.

Home Depot's stock price closed on December 31, 2021, at $415.01 per share.  Starting on January 1, 2022, investors began to reduce their Home Depot stock positions.  The concern about Home Depot's future sales centered around the announcements by the Federal Reserve that they would implement an aggressive rate hike campaign within a few months to reverse the rapidly rising trend of inflation.  Home Depot stock declined steadily in 2022 before bottoming on September 27, 2022, at $268.69 per share for a 68% decline that year.  Since then, investors have been slowly adding Home Depot to their portfolios, creating a mild positive trend. 

That is until recently. 

Last October Home Depot management reported their third quarter earnings before interest, taxes, depreciation, and amortization (EBITDA) was $ 7.425 billion.  By the end of March 31, 2024, Home Depot earnings had dropped 20% to $5.973 billion. 

Since the stock peaked on December 21, 2021, it has not closed above this level and after a short-lived rally in the first quarter of 2024, it has sold off all the year's gain and currently below its 20, 50, and 200 Day Moving Averages (DMA) for the fifth time since December 2021. 

Home Depot stock is down -3.09% vs the S&P 500 is 12.69% YTD through today.

We sold Home Depot out of most of our model portfolios early this month. 

However, the bigger picture is that consumers are changing where they spend their money, not just at Home Depot. 

We track two key indices that would indicate where consumers are shopping.  The first is the Consumer Discretionary Index Exchange Traded Fund (XLY).  The top holdings and the weighting of the stocks in this index ETF are:

Since 2013 when we added XLY to our model portfolios it has increased 261.1% and consistently outperformed the S&P 500 up to January 10thof this year.  However, since January the momentum of this index ETF has stalled while the S&P 500 continues to rise in value.

The contrasting index is the Consumer Staples Index ETF (XLP) that has its top holdings of:

Typically, during growth economies, Consumer Discretionary ETF will outperform the more conservative Consumer Staples ETF as consumer spending pushes up revenue and sales for high end electric cars (Tesla), travel (Booking Holdings, Royal Caribbean, Hilton, Marriott), specialty drinks (Starbucks) and expensive clothing/footwear (Lululemon Athletica, Nike).

However, early signs that the economy may slow down are when consumers reduce their spending on these discretionary items.  The changes in consumer spending can be observed when the Consumer Staples Index ETF outperforms the more exciting and dynamic Consumer Discretionary Index ETF.  Consumers may be getting nervous about the economy and their personal finances when XLP, with top holdings of Costco and Walmart, outperforms XLY, with top holdings in high highflyers of Amazon and Tesla.  In fact, you will notice that Home Depot and Lowes are in XLY, which may be part of its decline as consumers are slowing their spending on home improvements. 

Earlier this month, we sold XLY from our model portfolios and allocated the same amount to XLP.  We project that consumers will continue to reduce their spending on discretionary items in exchange for necessities.  We project that the Federal Reserve will hold interest rates for the balance of this year should inflation and indicators such as the Consumer Price Index (CPI) remain above their target levels.  The current interest rate environment, along with governments raising minimum wages, is challenging both consumers and businesses. 

The Bureau of Labor Statistics announced on Friday the unemployment rate has ticked up to 4.0%, the highest since December 2022.  More concerning is the momentum of more people working has stalled since the bounce back in 2020.  The percentage of those working has decreased to 60.10% and since 2020 the employment rate has not recovered from pre-pandemic levels nor even approached the peak achieved in April 2000 of 64.7%.

What Does This Mean to Me?

We maintain a favorable view of the US economy and stock markets.  However, evidence is starting to indicate that consumers may be changing their spending habits.  There are several reasons why people would start being more cost-conscious going into the summer months.  High interest rates and steady, albeit at a slower pace, rising inflation have cut into household budgets.  Unemployment has risen to 4.0%, and the number of people employed has declined in the past six months.  Nonetheless, it is odd that the Consumer Discretionary Index would begin to slow going into the summer months when, typically, it is a season of more spending on discretionary items like vacations and home improvement. 

As momentum style portfolio managers, we may not know why a stock or sector is slowing but its decline is something we pay attention to.  If a particular stock or sector continues to decline, we begin purging the portfolios to protect client profits and capital.  Further declines result in more purging until we may finally remove it entirely from our model portfolios. 

As most of our clients have been with us for years and some for decades, it is not a matter of if but when market rallies will fade and sometimes reverse into a correction.  Currently, our model portfolios are performing very well, with a focus on technology, including Nvidia (NVDA), Apple (AAPL), and NASDAQ index ETF funds.  

Let us know your thoughts on this Weekly Brief.  Also, we welcome the opportunity to connect with you to review your financial plan and investment accounts.  In most cases, we have been able to add valuable insights to achieve your goals in shorter time frames and sometimes with less risk than one's current strategy.