Consumer ETFs: The Consumer's Never Been Weaker?

We've witnessed a half-dozen hurricanes in the last few weeks. Gustav and Ike beat up both sides of the Gulf Coast, causing widespread concern in Houston and New Orleans. (The economic toll has yet to be tallied.)

But I did say a half-dozen hurricanes, didn't I? That's because Category 5, gale force winds have ripped through the epicenter of high finance. The owners of more than 50% of U.S. home loans, Fannie/Freddie, are effectively in the hands of the U.S. government. The 4th largest investment bank, Lehman, declared bankruptcy. Meanwhile, the 3rd largest investment bank, Merrill Lynch, accepted a buyout from Bank of America.

I have seen bear markets (2000-2002) that were more devastating to investors. I have seen crashes (1987) that were psychologically more destructive. I've even witnessed a bank crisis that ultimately claimed more institutions (600ish) when the Savings & Loan catastrophe played itself out in the late 80s/early 90s. Yet I have not seen a greater amount of change in so short a period of time.

In a couple of weeks, the entire face of money has changed entirely. In a couple of months, oil prices went from $100 per barrel to $150ish, and now back down to $95... where they began the year. What a completely surreal and super strange trip!

Through it all, the U.S. consumer is supposed to be unable to access credit, either from non-existent home equity or from maxed out cards. Retail sales declined for 2 consecutive months. And supposedly, people are not planning to ramp up their spending any time soon.

So it should come as a surprise that... with the broader U.S market down a whopping -15% for 2008 through 9/12/08... that the SPDR Retail Fund (XRT) is flat on the year. Even in the broader Select SPDR Consumer Discretionary (XLY), losses were an admirable -4.5%! (Plus, they've been sitting on the cusp of breaking through the 200-day trendline to the upside!)

Indeed, one can take this one step further. Through the Armageddon-like trading session of 9/15/2008, the overall markets struggled to contain single-day losses of 5%. Meanwhile, S&P Retail (XRT) and S&P Consumer Discretionary (XLY) are not feeling the same level of pain.

Frequently, I discuss the manner in which laggards often become leaders. For instance, take a look at the August feature on whether or not retail is worthy of a "second look."

Analyzing the consumer and the weakness in purchasing power would likely lead most to conclude that these investments should be getting creamed. The fact that they're not may suggest that there are enough contrarian thinkers participating... believing in the resilience of the U.S. consumer. It may even be a classic case of rotating into the weakest segments before the rest of the money gets there.

Either way, consumer stocks are performing surprisingly well. It's not irrational exuberance. And it certainly isn't irrational pessimism.

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