If the past week is any indication, now might be a good time to buy stock in a company that produces blood pressure medication.
For the millions of Americans with money in the stock market, the last week has been nerve wracking. On Monday, the Dow Jones Industrial Average fell 1,175 points, the largest percentage decline since 2011. Stock prices fell a total of 7% between closing on Feb. 1 and closing Feb. 5. Analysts attributed the crash to an increase in average hourly earnings for private sector workers, which led to concerns of rising inflation. Investors are worried that this could lead the Federal Reserve to raise short-term interest rates more aggressively than expected. On Thursday, the Dow fell another 1,033 points (4.15%).
Thursday brought another bump in the road, with the Dow Jones tumbling 1,033 points, or 4 percent, to 23,860.
Shares of public home builders were not impervious to the market volatility this week. The chart above illustrates how nine of the country’s top 10 builders fared from market close on Feb. 1 to market close on Feb. 7. From then end of Feb. 1 to the end of Feb. 5, each of the top 10 builders fell more than 4%, with Scottsdale, Ariz.-based Meritage dropping the most at nearly 10%. (NVR, which is not included on the chart, fell from $3,144.24 to $2,918.56, a 7.18% decline.)
As of market close on Feb. 7, the big builders were rallying although none had reached their pre-dip numbers. From the end of Feb. 5 to the end of Feb. 7, Taylor Morrison’s stock price climbed 5.95%, followed by Lennar (5.58%), and CalAtlantic (5.36%). (Click here for a list of all public home builders.)
BUILDER spoke with Jamie Pirrello, chief financial officer of the Interior Logic Group and former chief financial officer of UCP, to find out what led to the steep decline and what shareholders can expect moving forward.
B: Home builder stocks fell steadily for more than a week (in most cases) prior to and including the recent crash, can you attribute that trend to one or two causes? Are forecasted rate hikes a big reason for the volatility?
P: Clearly, the market fears rising interest rates as it pertains to expectations of future performance of home builders. The fear is as interest rates rise, fewer customers can afford to purchase a home thereby slowing housing performance. While this is true, the market seems to be missing that rising wages will have the potential to offset higher interest rates. Housing has always been driven by employment growth and household formations. We have enjoyed continued and significant employment growth. Employment growth and growth in wages positively impacts household formation, so it is surprising that investors have punished housing stocks to the degree they have over the last week.
B: What has led to the bounce back over the last two days?
P: I think the bounce back is a result of investors understanding that things are not as bad as first thought. Yet, while the market has partially bounced back, the continued high level of volatility remains concerning.
B: Will the next few weeks and months be bumpy for home builder stocks?
P: Two things will impact home builder stock prices in the near future. The first is the overall performance of the market. I think home builder stocks will perform poorer than the market both on the downside and the upside because concerns of rising interest rates disproportionately impacts builders.
Secondly, industry performance over the next three weeks as the public builders report earnings, sales, and closings for the fourth quarter will clearly impact investor behavior. Strong performance across the industry should positively impact home builder stocks while poor or lackluster performance could put additional downward pressure on home builder stock prices.
