ETF Expert

For the longest time, the media have pounded the investment community with a singular statistic: specifically, consumer spending represents 2/3 of the growth in the U.S. economy.

The problem with the statistic, which varies from 64%-72% depending on your source, is explaining stock prices by GDP alone. Most of the perma-bears explain that millions of additional unemployed translates into less consumer spending and a sluggish economy. Therefore, perma-bears conclude, stock prices are too high.

Yet this is an illogical leap. Job growth (loss) is merely one factor in a myriad of influences on what investors are willing to pay.

Keep in mind, part of the reason stocks have moved higher over the last 13 months is that credit conditions for businesses have improved, interest rates are still accommodative and inflation via CPI remains in check. Moreover, M&A is picking up, corporations have been beating earnings expectations and many are buying back their shares. On top of all that, you had panic psychology as well as techincal and fundamental valuation forces at play. (It’s not all GDP!)

Don’t get me wrong. I am hardly discounting the importance of job growth or GDP, particularly on the psychology of the investing public.

It just seems a bit silly to argue that job stats or consumer sentiment are all that matters, anymore than one can say that oil prices, or the U.S. dollar or interest rates can single-handedly tell you what will happen next. That said, I’d realllllllllly like to see that U.S. dollar take a break soon!

Granted, no segment is entirely immune to the effects of the end consumer. Yet the biggest conglomerates and largest industrials may be poised to climb when there’s economic growth “sans” vibrant consumerism. Indeed, they are leaner and meaner than back in October 2007, with an upward trajectory in both top-line revenue and bottom-line profits.

Additionally, it’s sometimes important to look at consistency over time intervals. Here’s how the various Sector ETFs stack up over 1 month, 3 month, and 6 months:

Perhaps ironically, the most consistent performers — those that have risen over all 3 popular time periods — include both the Industrials (XLI) as well as Consumer Discretionary (XLY) and Consumer Staples (XLP). Although I may not have “bought into” the notion that households are done deleveraging… that they’ve begun the process of ramping up their spending… investors have bought in.

Nevertheless, we can see that the most consistent performers have been a collection of American mainstays… from GE to United Technologies to Caterpillar to 3M. And a better way to play strength in industrials may be Select SPDR Industrials (XLI), rather than the Dow 30 Industrials (DIA).

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