Timberrrrr

When a pandemic strikes and causes the United States to shut down, what’s the first thing Americans stock up on? Apparently, toilet paper is the first thing we think of. What’s the first thing Americans stock up on now that the pandemic is coming to an end? Lumber! This has left some people scratching their heads, but it’s not too surprising when you look at the demand for remodeling, homebuilding, and I don’t know how many outdoor seating structures at restaurants.

We’ve been talking a lot about “bubbles” over the past year here at SMB. Everywhere you look, it seems there’s news of a hot item everyone wants to get their hands on. Would you ever expect lumber to be one of those items? We didn’t. Bitcoin, meme stocks, and toilet paper are one thing, but heading over to Home Depot to stock up on some 2x4s during the shutdowns didn’t land on our to-do list. It did for plenty of other Americans!

Much of this issue stems from a mix of supply shortages and excessive demand. The stimulus checks have continued to pour into all areas; remodeling and building at the top of the list. All the while, lumber mills were forced to shut down or slow production throughout 2020. And when you mix low supply with high demand, bad things happen.

The result: lumber prices have skyrocketed over the past year. We have heard about this from clients and friends on a word-of-mouth basis, with many noting that a single piece of plywood had tripled in cost. We now have plenty of data and fancy charts to illustrate.

Normal prices for lumber typically come in just under $400 for every 1,000 board feet (the average for a good portion the past decade). This year alone, prices have quadrupled that number, putting the cost above $1,600 in May…and, as you can see from the chart, it didn’t stay there for long. Prices have dropped like this tree my son, Henry, helped me take down recently. Timberrrrrr!

Prices for lumber have now dropped 40% since the high in May. Before you get too excited, prices are still incredibly high. This only puts us at just over double what is commonly seen in stable years. It could be some time before the prices we’re paying at the hardware store go lower. 

On a practical level, the higher lumber prices are yet another sign of inflation. 

Federal Reserve officials came out today to discuss the rise in inflation which is now well above their goal of 2% per year, with a year-over-year increase of 3.6%. As inflation continues to rise the Federal Reserve will be forced to raise interest rates. Projections now show interest rates will gradually start increasing again, slated for two increases in 2023.

If rates rise gradually, the stock market and our accounts should react well. If inflation picks up and does not moderate over time, as the Federal Reserve expects, they may feel they need to raise rates at a faster pace and this could present some volatility in the market.

As most of our clients know, we don’t shy away from volatility and believe it’s actually healthy for the stock market to go through these periods. We’ll be watching for this and look to do some buying if/when this happens.

Thanks for reading,