Lower rates may finally be on the horizon.
The biggest news of the week wasn’t earnings — it was a lower-than-expected reading of inflation. According to the Bureau of Labor Statistics, consumer prices rose 3.3% from a year ago in May, but that was down from 3.4% in April and was below expectations.
Speculation ran rampant the Federal Reserve would cut interest rates as a result of lower inflation to stimulate the economy and stave off what could become a deflationary environment in some parts of the economy. Rate cuts haven’t happened yet, but these market indicators increased the odds they will happen this year.
According to data provided by S&P Global Market Intelligence, shares of Zillow (ZG -1.10%) jumped as much as 14% on the inflation news, Nextdoor (KIND 1.20%) jumped 17.2%, and Sunnova Energy (NOVA -2.56%) rose 12.7% at its peak. The stocks closed the week up 12%, 14.5%, and 8.6% respectively.
Will housing make a comeback?
All three stocks are ultimately dependent on the housing market, which has been in a funk for most of the last year. Higher interest rates make it harder to afford homes and finance solar projects. The impact on all three companies is indirect but clear.
US Existing Home Sales data by YCharts
While the short-term speculation is that rates will come down, we haven’t seen a big move in that direction. The 1-year Treasury yield dropped slightly this week, and there are signs mortgage rates are starting to come down, but that will take time.
1 Year Treasury Rate data by YCharts
The impact of lower rates
Rates are important for homebuyers because lower ones make monthly payments more affordable. And more volume through the real estate system is ultimately how Zillow makes its money.
Sunnova is more directly impacted because it lines up financing for solar projects, and customers can simply choose not to install solar if the numbers don’t make sense. Higher rates led to a massive decline in solar installations in 2023, and any reprieve would be welcome.
Nextdoor’s big move
The reason Nextdoor is up may be a little more puzzling. Shares dropped sharply late last week, and this week its CEO was named CFO of OpenAI.
I also think investors are looking for any reason to bid up a company that’s been losing money like crazy since coming public. Will lower rates help? Probably not, but it’s high-risk, money-losing stocks that often react first when rates fall.
KIND Revenue (TTM) data by YCharts
Short-term moves and long-term impact
I don’t think any of these moves were particularly meaningful to the long-term trajectory of these companies. Lower interest rates could eventually help revive the housing market and drive more solar installations, but one inflation reading isn’t enough to cause a turnaround.
A real recovery in these businesses will take years, and if that’s the kind of time frame you have, this can be a good buying opportunity. But the short-term move is noise and isn’t what long-term investors should be focused on. I’ll wait for more earnings progress to be a buyer, especially in the solar recovery expected in 2024.
Travis Hoium has positions in Zillow Group. The Motley Fool has positions in and recommends Nextdoor and Zillow Group. The Motley Fool has a disclosure policy.