As the real estate and credit markets are facing contraction due to higher interest rates, this is an opportune moment to review Williams-Sonoma (NYSE: WSM). The company is arguably the highest quality home furnishing retailer in the US, with peer-leading profitability and business execution.
The Eye of The Storm
One of the great ironies of the Covid-induced economic shutdown is that the loose fiscal and monetary response was funneled directly into asset prices, thereby fueling hyperinflationary price effects. For example, the S&P/Case-Shiller U.S. National Home Price Index spiked by 45% from January 2020 through June 2022. The following chart, courtesy of the St. Louis Federal Reserve, displays the index over that period.
Source: St. Louis Federal Reserve
In comparison, the final two years of the previous housing bubble (June 2004 through June 2006) saw the Case Shiller index rise by 23%. The three years leading into the June 2006 peak witnessed a 39% increase. The Covid housing price bubble materially surpassed the 2006 peak in magnitude and velocity.
As much of the economy was shut down in response to Covid, the US housing market was not being driven by economic fundamentals. The US had entered a pure price bubble phase resulting from excessive liquidity and too easy credit conditions. The following chart displays the full history of the Case Shiller National Home Price Index. Notice the phase change to a hyperinflationary price trajectory beginning in 2020.
Source: St. Louis Federal Reserve
With recent bank failures making front page news, it is fair to say that excess liquidity and too easy credit conditions are no longer present. In fact, the exact opposite conditions now prevail as the markets exit the calm waters of the eye of the economic hurricane.
The key question for the Williams-Sonoma investment case is what does the other side of the eyewall look like?
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