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Time to Worry about Consumers?

Eric Dutram

In many ways, a strong consumer helped to push the market higher in the past few months, as firms from this corner led the way to new highs. Broad ETFs tracking the consumer discretionary market like the Consumer Discretionary Select Sector SPDR (XLY) are pretty close to their 52 week highs with the bulk of the gains coming in the trailing three month period.

However, the latest consumer confidence report was very bearish and could suggest some weakness in the space going forward. The key measure plunged to 58.6, well below the consensus of 65.1 and three points below even the most bearish prediction from those surveyed.

It appears as though the higher payroll tax is really starting to weigh on confidence, leaving many gloomy about their earnings prospects in the future. Just 13.6% surveyed see their income increasing, marking the lowest reading on this front since 2011.

The news isn’t all bad though, as home prices continue to hold firm and the job market has been improving—albeit slowly—for some time now. One has to believe that this could help to boost confidence back higher, but it is hard to say at this point in time whether this will be enough to make up for the income reduction thanks to the higher taxes.

What do you think, should we be worried about the consumer going forward or is this a temporary bump in the road?

Are you a buyer or seller of discretionary firms at this point?

Let us know in the comments below!

Read the analyst report on XLY

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