Shares of Home Depot (NYSE: HD) were pulling back today even though there was no company-specific news out on the stock. Instead, investors in the home improvement retailer were reacting to Donald Trump's victory. While stocks were up broadly, the real estate sector was down as Treasury yields jumped, a sign that investors think that interest rates could rise in a Trump administration due to deficit spending and tariffs, which could lead to inflation, potentially preventing the Fed from lowering interest rates as it has intended.
Home Depot stock was down 3.7% on the news as of 12:47 p.m. ET. ETFs tied to homebuilders and real estate were also down even as the S&P 500 was up more than 2%.
Image source: Home Depot.
Will a housing recovery materialize?
Home Depot stock has gained most of the year in spite of weak results as investors have been optimistic about a turnaround in the housing market and have looked forward to interest rate cuts from the Fed, which began in September.
Democratic presidential candidate Kamala Harris had arguably made fixing the housing shortage a higher priority than Trump as well, so today's sell-off could reflect the lack of a more robust plan to fix the housing shortage.
However, investor focus now seems to have shifted away from the housing recovery, especially as Treasury yields spiked in response to the market's anticipation of Trump's policies.
The biggest factor for driving a housing recovery is bringing down mortgage rates, but if benchmark interest rates, which are tied to mortgage rates, stay high, the lock-in effect of the pandemic is likely to persist, and homeownership will remain out of reach for many Americans.
Keep your eye on the Fed
The Federal Open Market Committee is set to make its interest rate decision tomorrow, and investors are expecting a 25-basis-point cut, which would lower the benchmark Fed funds rate to 4.5%-4.75%. We'll also get some commentary from Fed Chair Jerome Powell, which will be key in determining the trajectory of future rates.
That's not the only factor that influences mortgage rates, but it's an important one. If 30-year mortgage rates remain elevated during the second Trump administration, the hoped-for comeback from Home Depot and the housing market is unlikely to materialize.
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Jeremy Bowman has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Home Depot. The Motley Fool has a disclosure policy.
