The economy is growing at a modest pace and the consumer discretionary sector is heading well, with growth projected for the remainder of the year. This is because a strengthening economy and better job prospects are supportive of economically sensitive sectors like consumer discretionary, which typically perform well in a maturing economic cycle.
Below we discuss some strong reasons for investing in consumer discretionary ETFs now.
Encouraging Industry Trends
Consumer discretionary has been the best performing sector from a year-to-date look. Notably, the ultra-popular Consumer Discretionary Select Sector SPDR Fund (XLY – ETF report), which tracks the Consumer Discretionary Select Sector Index, is up modestly 0.7%. After all, cheap fuel and rising income are leading to fatty wallets, which along with an improving U.S. economy, better job prospects and increasing consumer confidence are making the segment a great space to stay invested in (see: all the Consumer Discretionary ETFs here).
Consumer spending, which accounts for more than two-thirds of U.S. economic activity, rose 0.4% in August, indicating the improving health of the consumer sector. Additionally, the recent consumer sentiment survey has also been extremely positive with the latest reading surpassing expectations. The monthly Consumer Confidence Index, measured by the Conference Board, climbed to 103 in September from a revised 101.3 in August.
The University of Michigan consumer sentiment index rose to 92.1 in early October from 87.2 in September, indicating that economic recovery is on track despite the twin attacks of a strong dollar and weak global demand that have hurt the industrial sector, especially manufacturing.
Holiday Optimism
With Halloween around the corner and Christmas just eight weeks away, the consumer discretionary sector is expected to gain the most from the holiday shopping season.
The National Retail Federation (NRF) expects sales in November and December (excluding autos, gas and restaurant) to grow at a solid pace of 3.7%. Though this marks a deceleration from the last year’s growth rate of 4.1%, it is well above the 10-year average of 2.5%. A recent survey by Gallup showed that Americans intend to spend an average $812 on gifts this holiday season, up from $781 last year and the highest expected spending since 2007.
Positive comments from some of the leading retailers confirmed this trend. In fact, the world’s largest retailer Wal-Mart (WMT – Analyst Report) has kicked in a layaway program two weeks earlier, providing shoppers 90 days’ credit instead of 60 previously while Target (TGT – Analyst Report) has expanded its price-match policy from 5 to 29. Additionally, the second largest courier company FedEx (FDX – Analyst Report) is seeking a 12.4% rise in shipments to a record of 317 million from Black Friday through Christmas Eve.
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