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Stocks ETFs Dependent On Consumer Spending May Be In Trouble

17 September 2013 at 11:44 am by Gary Gordon     Bookmark and Share    Follow EtfExpert on Twitter

According to Gallup, consumer spending dropped 15% from mid-August and it has been flat since the Federal Reserve’s tapering talk in May. Casual dining expenditures declined 3.5% in July as well as 2.0% in June. Meanwhile, Warren Buffett has been rapidly exiting stocks that are tied to consumer purchasing activity.

Many market watchers recognize that there has been enormous strength in big-ticket consumption like auto and home. However, with wage growth stagnant, we’ve been making those acquisitions on credit with Fed-manipulated lending rates. And those lending rates are moving noticeably higher as the Fed prepares to pull back from its bond buying intervention.

It follows that consumer-oriented stocks may be in a bit of a bind. Rising rates will not make big-ticket items easier to acquire. Similarly, the absence of personal income increases makes it difficult for consumers to fuel discretionary purchasing.

Consider the waning momentum of retail ETFs like SPDR S&P Retail (XRT). Until August of this year, SPDR S&P Retail (XRT) had been comfortably outpacing the S&P 500 SPDR Trust (SPY) as depicted in the price ratio below. For the last month, however, the XRT:SPY ratio has demonstrated relative weakness, by remaining below a key trendline. Similarly, the slope of the XRT:SPY 50-day moving average has declined steadily since June.


Not a chart fan? Then consider the fundamentals. The Forward P/E for XRT as well as for SPDR S&P 500 Sector Select Consumer Discretionary (XLY) both hover near 19. Of the 9 S&P 500 sectors in the SPDR series, consumer discretionary is the most expensive.

Truth be known, no segment of the economy will thrive in a broad market correction… and we’re certainly due for something with a bit more bite than 5%. That said, with two-thirds to three-fourths of the U.S. economy dependent on household consumption, it’s no wonder that Wall Street is addicted to ultra-low rates; Americans must keep borrowing to eat cake because significant wage growth is unlikely to occur anytime soon.

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Disclosure Statement:¬†ETF Expert is a web log (‚ÄĚblog‚ÄĚ) that makes the world of¬†ETFs easier to understand. Gary Gordon, MS, CFP is the president of¬†Pacific Park Financial, Inc., a Registered¬†Investment Adviser with the SEC. Gary Gordon, Pacific¬†Park Financial, Inc., and/or its clients may hold positions in the¬†ETFs, mutual funds, and/or any¬†investment asset mentioned above. The commentary does not constitute individualized¬†investment advice. The opinions offered herein are not personalized recommendations to buy, sell or hold securities. At times, issuers of exchange-traded products compensate¬†Pacific Park Financial, Inc. or its subsidiaries for advertising at the¬†ETF Expert web site.¬†ETF Expert content is created independently of any advertising relationship.

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