What Happened:
Shares of luxury furniture retailer Arhaus (NASDAQ:ARHS) jumped 8.2% in the afternoon session after investors seem to be rotating out of large-cap tech winners like NVDA, GOOGL, and MSFT and into smaller cap stocks, with housing stocks as a bright spot in particular.
The rotation was likely sparked by today's inflation report by the Bureau of Labor Statistics. It revealed that CPI (Consumer Price Index - a gauge of the average price consumers pay for goods and services) for the month of June 2024 came in better than expected at 3% year on year (the lowest level in more than three years). The recent inflation prints supported the argument that the Fed will start cutting rates this year as the headline figures moved closer to the 2% target.
Lower rates greatly impact the housing market, which has been tepid in the last year-plus. Specifically, lower rates make homebuying more affordable for consumers because on the same value home, monthly payments are less with a lower mortgage rate.
Before rates began to rise 2022, many potential homebuyers anchored on a home value they could afford--let's say $450,000. As rates rose, the home they could afford with the same monthly payment fell--let's say towards $300,000. However, they weren't very excited about buying a lesser home after having their eyes on higher-value homes. Many chose not to transact. On the other side of the coin, many homeowners with mortgage rates in the 2-3% range chose not to sell because of the prospect of having top buy a new home with a 6-8% mortgage rate attached to it. Demand suffered. Supply suffered. Today's inflation report could be an early sign that the housing market could thaw and even become hot if the Fed cuts rates.
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What is the market telling us:
Arhaus's shares are very volatile and over the last year have had 20 moves greater than 5%. In context of that, today's move is indicating the market considers this news meaningful but not something that would fundamentally change its perception of the business.
The previous big move we wrote about was 3 days ago, when the company dropped 9.1% on the news that Jefferies analyst Jonathan Matuszewski downgraded the stock's rating from Buy to Hold and lowered the price target from $22 to $16. The analyst cited multiple concerns, including "slowing site traffic growth, falling e-commerce conversion, and a growing percentage of browsing activity tied to sale SKUs."
The analyst also highlighted worries related to the housing market, adding, "As investors increasingly embrace a view of persistently stubborn housing turnover into 1H'25, we believe stocks with rich margin expansion will outperform, and we now have less conviction that ARHS will check that box."
Arhaus is up 38.2% since the beginning of the year, but at $16.15 per share it is still trading 17.9% below its 52-week high of $19.68 from June 2024. Investors who bought $1,000 worth of Arhaus's shares at the IPO in November 2021 would now be looking at an investment worth $1,260.
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