On August 25th, the Department of Commerce reported July new home sales reached 901,000 – a level not seen since 2006 (chart, below). New home construction and a home improvement boom combined to put upward pressure on the price of lumber. This has been good news for home improvement retailers as they’ve been able to pass the rising cost along to customers. Home Depot mentioned lumber ten times on their second quarter earnings call (vs. only twice in Q1) and said “inflation in core commodity categories like lumber positively impacted our average ticket growth by approximately 61 basis points.”
Historic lumber rally
August 25th also marked the 100th day from the COVID-19 low for lumber prices (as measured by a hypothetical 91-day perpetual contract). From that low, the price for lumber has risen over 150% – the single highest gain over that time frame.
A day later, on August 26th, a rapidly strengthening Hurricane Laura was upgraded from level 1 to level 4. This pushed futures prices up further at all expirations with deliveries next summer now exceeding $600 mbf (chart, below). The hurricane’s arrival on the shores of Louisiana early on August 27th marked the first landfall of a category 4 hurricane since Florence in 2018.
At NDR, we like to use history to inform our views about what may occur. We looked at how lumber and the home improvement retailing sub-industry performed during hurricane seasons. We divided seasons into two categories – those which experience a Category 4 hurricane and those that do not. Atlantic hurricane season starts at the beginning of June and goes through the end of November. However, most intense storms form between late August and the end of September. By our records, there were six seasons since 1989 with at least one category 4 hurricane to make landfall in the U.S
We selected August 15th as the start of peak hurricane season and constructed composite series for the following six months.
Lumber tends to exhibit a positive seasonal trend during hurricane season. However, in seasons with a Category 4 hurricane, volatility has increased during late summer and early fall before posting higher than average gains (chart below).Historically, home improvement retailing has shown positive relative strength (vs. the S&P 500) during hurricane seasons. Similar to lumber, the sub-industry has also had higher returns during those seasons with a category 4 hurricane.
Homebuilders or Consumer Discretionary?
Homebuilding ETFs ITB, PKB and XHB offer exposure to home improvement retailers along with home builders. Home builders may face some headwinds with rising mortgage delinquencies, and tightening credit standards. A greater exposure to home improvement retailing can be obtained via consumer discretionary, which our sector team has on upgrade watch, ETFs X LY and RTH. Home improvement retailing stocks make up less than ten percent of ITB, PKB or XHB. For XLY and RTH, the sub-industry comprises over 17%.
Originally Posted on August 31, 2020
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