The U.S. presidential election is less than one month away, and considering the volatile feelings about the candidates, it's entirely possible the results could trigger a stock market crash. If that happens, one would expect most stocks to sink, including that of luxury furniture retailer RH (RH -0.70%).
When stocks fall, it creates problems for some investors, but it also potentially creates buying opportunities. Those opportunities arise because sometimes a business is performing well, but its stock price gets caught up in the trends of the broader market and tanks.
However, in the case of RH (formerly known as Restoration Hardware), a stock market crash itself could hurt its actual business. Here's how.
How a crash hurts RH
With everything that has happened since, it may be hard to remember that the S&P 500 fell about 15% from late 2018 to early 2019. That's considered a major pullback, and it didn't go unnoticed in RH's earnings conference call to discuss first-quarter results for 2019. Regarding people with high net worth (RH's core demographic), CEO Gary Friedman said, "most of the net worth is tied up in the markets." He followed this by saying, "so if you get the public markets moving 18% down, I mean I would expect our business to get impacted."
Friedman's statement is supported by data. According to the Federal Reserve, total U.S. household wealth was $112 trillion as of the second quarter of 2020. Around 69% of this wealth was owned by the top 10% of Americans, prime potential customers for RH. But much of it is tied up in assets like stocks and real estate.
This is why the net wealth of billionaires and many other Americans went up in 2020 despite the effects of the coronavirus pandemic on the U.S. economy. Amazingly, stocks and real estate values are up. Therefore, those who own assets saw their net wealth increase this year. Those who don't own assets didn't.
But it works the other way, too. If stocks crash (say, after the election), the net wealth of the affluent would go down. And when that happens, these people tend to delay pricey purchases until things are more favorable. That would absolutely hurt RH's business.
On the other hand...
To quote a current presidential candidate, "Here's the deal." We don't know if the election will cause a market crash. Looking back to 2016, the S&P 500 gained about 22% from November 2016 to November 2017. No one predicted such a gain based on the outcome we had. In short, no one can predict with certainty what will happen or the market's reaction.
Furthermore, even if there's a stock market crash following this election, stocks have historically always bounced back. The last time the S&P 500 fell for four consecutive years was 1929-1932. Of course, that coincided with the Great Depression. So the odds of stocks falling in each year of the next presidential term are astronomically low. Markets do fall and economies recede, but these setbacks tend to be short-lived.
Regarding market crashes, Friedman also said: "A market correction is not a constant. A recession is not a constant. We've bounced back from every recession in the history of the United States, every single one of them. We've bounced back from every market correction in the stock market, every single one of them." These are words to keep in mind as we draw closer to the upcoming election.
Calmly envisioning beyond a potential crash
We don't know what's going to happen in the short term. And economic downturns usually recover in the medium term. Therefore, the most logical thing to do with RH stock is to stay calm and focus on the long term. And in the long term, RH management aspires to build a $20 billion brand.
There really isn't another retail company trying to do what RH is doing. These days the furniture business is about e-commerce, low prices, and broad appeal. RH is focusing on large brick-and-mortar spaces and luxury pricing to a limited economic demographic. But this maverick plan has produced market-beating returns so far.
In 2019, before the coronavirus, RH generated net revenue of $2.6 billion. The company intends to grow this by opening new retail locations using the capital-light method of sale-leaseback transactions. It's also expanding its addressable market by operating restaurants, hotels, and other luxury experiences -- all intentionally complementary to the retail business. It's a unique approach, and management doesn't see a true rival anywhere, providing further motivation to soon expand internationally into Europe.
RH's long-term plan could produce market-beating returns. But this doesn't mean investors should totally disregard the risk that a potential stock market crash poses to RH's business. On the contrary, it's a vital part of the equation when weighing risk against reward.
Investors should remember that all companies face risks, and RH isn't immune. But that shouldn't keep you on the sidelines altogether. There are always good stocks to buy somewhere.