Retail sector ETFs are trading at all-time highs as consumers grow more confident to spend and borrow after years of deleveraging in the wake of the financial crisis. However, March retail sales likely slowed after February’s data revealed the largest increase in five months.
Consumer discretionary ETFs have been leading the market higher during the latest rally that kicked off last November despite lingering worries over a soft job market, the sequester and massive Federal Reserve stimulus.
Yet the consumer deleveraging process may be coming to an end after years of hunkering down.
U.S. households increased their borrowing at an annualized rate of 2.4% in the fourth quarter, the largest jump since 2008, The Wall Street Journal reported.
“The fourth quarter marks the end of household deleveraging in the U.S.,” said Harm Bandholz, chief U.S. economist at UniCredit, in the article.
“The fact that this area remains strong, with a record price high being recorded just last Wednesday, indicates that the general market remains in rally mode. Should this industry start to sag, then it would be a concern but as yet, there is no sign of that,” he wrote in a newsletter Monday.
XLY is up 14.1% the past six months, compared with a gain of 8.6% for SPDR S&P 500 ETF (SPY).
On Friday, investors will get the latest monthly data on retail sales and consumer sentiment. Last week’s nonfarm payrolls report was much weaker than expected.
Steve Goldstein at MarketWatch reports that there is concern consumers “will by now have adjusted their spending patterns to the elimination of the payroll tax break, though it’s probably too soon for the sequester to play a role.”
“What we’re seeing is that people are definitely cautious, but they are still continuing to spend, at least the ones who are fully employed,” said Raj Kuman, partner at the consulting firm A.T. Kearney, in the story.
Economists are forecasting that March retail sales slowed after rising 1.1% in February.
“A March slowdown in hiring combined with little growth in wages may make it difficult for household spending, which account for about 70% of the economy, to extend gains seen at the end of 2012 and the first two months of this year,” Bloomberg News reports. “Nonetheless, Americans are finding relief in falling gasoline prices and cheaper borrowing costs, which will prevent a slump.”
Consumer Discretionary Select Sector SPDR
Full disclosure: Tom Lydon’s clients own SPY.
The opinions and forecasts expressed herein are solely those of John Spence, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.