Here’s What Democrats Taking Back the House and Senate Could Mean for Housing Stocks Like Home Depot and Lowe’s

Stocks soared Wednesday as investors reacted to a clean sweep by Democrats in the midterm election.

Stocks were initially down when results started to roll in Tuesday night, in part due to fears of a data center crackdown, but futures turned green later in the evening, and all three major indexes soared on Wednesday.

It wasn't immediately clear why stocks jumped on the results, though it appeared to be a combination of several factors. Investors were glad to see pushback on the Trump administration validated, including on inflation and the war in Iran. Investors tend to like a divided government, and with Democrats gaining solid control of both houses of Congress, they clearly have that. Finally, President Trump was surprisingly conciliatory, saying he would "absolutely accept the results of the election," and was willing to work with Democrats, which could pave the way to a productive Congressional term.

Among the winning sectors today was housing, which has languished over the last two years due to high mortgage rates and weak housing turnover. The State Street SPDR S&P Homebuilders ETF (NYSEMKT:XHB) closed up 5.4%, reaching its highest point in more than two months, while Home Depot (NYSE:HD) and Lowe's (NYSE:LOW), the two leading home improvement retailers, were up as well. Home Depot finished up 6.5%, and Lowe's jumped 7.5%.

Democrats haven't outlined any specific housing policy proposals, but investors are clearly hopeful that the shake-up in Congress will help solve the nation's housing crisis and give a boost in demand to Home Depot and Lowe's.

Image source: Getty Images.

Can Democrats spark a turnaround for housing stocks?

Expected incoming Speaker of the House Hakeem Jeffries said the election was about affordability and that tackling high housing costs should be a top priority for the new Congressional majority.

Democrats strongly supported the housing affordability bill that became law this summer, which intended to boost housing supply and also capped single-family home purchases by large institutional investors.

The real test for the housing market may be whether Democrats can help bring interest rates down, which would, in turn, lower mortgage rates. The best way to do that would be to cool inflation, which could be helped by ending the war in Iran and easing constraints in the Strait of Hormuz, thereby bringing energy prices down. Elsewhere, Dems can help end the tariff regime and promote other policies to help increase the supply of goods and services and bring down prices.

The 10-year Treasury yield did fall 1.2% on Wednesday, closing at 4.89%, which may be a sign that investors expect interest rates to fall.

Will Home Depot and Lowe's keep rising?

With the exception of interest rates, which can come down simply due to changes in investor behavior and expectations, it will take months for any meaningful policy to emerge from Congress.

However, sentiment counts for a lot in the stock market, and that could continue to lift these stocks as we saw today. If consumers do see inflation start to ease, we could see a boost in traffic toward Home Depot and Lowe's as homeowners decide to take up the projects they've delayed.

These stocks are overdue for a recovery, but the conditions need to be right for the businesses to bounce back. Investors are clearly ready for it, based on today's reaction. Keep your eye on new housing policy once the new year begins, as Home Depot and Lowe's could bounce off of any promising new proposals.

Jeremy Bowman has positions in Home Depot and SPDR Series Trust - State Street SPDR S&P Homebuilders ETF. The Motley Fool has positions in and recommends Home Depot. The Motley Fool recommends Lowe's Companies. The Motley Fool has a disclosure policy.