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Will ETFs Suffer as US Consumer Sentiment Falls in October?

The U.S. consumer sentiment takes a hit in early October from the rising concerns over surging coronavirus cases and inflationary levels.

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This story originally appeared on Zacks

Concerns about coronavirus cases, inflationary levels and supply-chain challenges finally took a toll on the U.S. consumer sentiment. The University of Michigan’s preliminary consumer sentiment declined to 71.4 in October from 72.8 last month. The metric lagged the market forecast of 73, per The Wall Street Journal’s survey on economists.

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The measure of current economic conditions dipped to 77.9 in October from September’s 80.1. A gauge of consumer expectations slid to 67.2 in October from 68.1 in the previous month.

One-year inflation expectation increased to 4.8% in October from 4.6% in September. The survey's five-year inflation outlook declined to 2.8% in October.

In this regard, Surveys of Consumers chief economist Richard Curtin, said that "The Delta variant, supply-chain shortages, and reduced labor-force-participation rates will continue to dim the pace of consumer spending into 2022." This was reported in a MarketWatch article.

Consumers seem disturbed about the rising prices of homes, vehicles and household durables. In fact, the buying attitude toward vehicles and homes looks controlled. Commenting on the data release, Citi economist Veronica Clark said that "Prices remain elevated and there is a risk that a renewed increase in prices for goods such as autos could lead to a further worsening assessment of buying conditions for consumer goods," according to the same MarketWatch article.

Present U.S. Economic Scenario

The third-quarter earnings season started with a bang. Going by the FactSet data, of the 41 S&P 500 companies that have reported the third-quarter results so far, earnings of 80% surpassed the EPS estimates (per a CNBC article). Per FactSet, this earnings season is expected to witness the third-highest quarterly profit growth rate of 30% for the S&P 500 companies since 2010.

In another encouraging development, the retail sales data came out to be remarkable. The metric rose 0.7% in September against the Dow Jones estimate of a 0.2% decline. This, in turn, marks a 13.9% increase from the year-ago figure (according to a CNBC article). After excluding auto-related sales, retail sales were up 0.8%, surpassing the 0.5% estimate and gaining 15.6% on a year-over-year basis.

Lower-than-expected weekly jobless claims were added to the list of positive economic data releases. Initial unemployment insurance claims in the week ending Oct 8 came in at 293,000, as mentioned in a CNBC article. According to the same article, the metric had slipped below the 300,000 level for the first time during the pandemic.

The latest ISM Manufacturing Purchasing Managers' Index (PMI) data for the United States paints a rosy picture of the U.S. economic recovery. According to a Reuters article, the metric rose to 61.1% in September from 59.9% in August and surpassed forecasts of a decrease to 59.6.

Any reading above 50% indicates expansion in U.S. manufacturing activities. The manufacturing sector, which makes up 12% of the U.S. economy, saw the reading rise forthe 16th consecutive month.

The recently released minutes from the Federal Open Market Committee’s September meeting highlighted that the Fed might begin tapering the fiscal stimulus support program from mid-November.

The central bank is expected to roll back the month-end bond purchases by cutting $10 billion of $80 billion a month in Treasury’s and $5 billion from $40 billion a month in mortgage-backed securities (per a CNBC article). If everything goes well, the Federal Reserve expects to finish off tapering by mid-2022.

Investors seem continuously worried about the soaring inflation levels. Per the latest Labor Department report, the Consumer Price Index in September rose 5.4% year over year, higher than the Dow Jones estimate of a 5.3% rise, per a CNBC article. The metric touched the highest level since January 1991. It also increased 0.4% for the month, surpassing the 0.3% Dow Jones estimate. The escalating food and energy prices might be primarily responsible for the higher inflation levels.

ETFs That Might Suffer

The disappointing consumer sentiment might affect the consumer discretionary sector, which attracts a major portion of consumer spending amid rising inflation levels. Here we highlighted the four most popular funds that target the broader consumer discretionary sector (see all Consumer Discretionary ETFs):

The Consumer Discretionary Select Sector SPDR Fund XLY

This is the largest and the most popular product in the consumer discretionary space with AUM of $20.31 billion. It tracks the Consumer Discretionary Select Sector Index. The fund charges 12 basis points (bps) in fees per year and carries a Zacks ETF Rank #2 (Buy) with a Medium-risk outlook (read: ETFs to Buy on Tesla Record Q3 Delivery Numbers).

Vanguard Consumer Discretionary ETF VCR

This fund currently follows the MSCI US Investable Market Consumer Discretionary 25/50 Index. VCR charges investors 10 bps in annual fees. The product managed $6.61 billion in its asset base and sports a Zacks ETF Rank #1 (Strong Buy) with a Medium-risk outlook (read: ETFs to Suffer as US Consumer Confidence Falls in September).

First Trust Consumer Discretionary AlphaDEX Fund FXD

This fund tracks the StrataQuant Consumer Discretionary Index, which employs the AlphaDEX stock-selection methodology to select stocks from the Russell 1000 Index. FXD has AUM of $1.93 billion. It charges 63 bps in annual fees and has a Zacks ETF Rank #3 (Hold) with a Medium-risk outlook.

Fidelity MSCI Consumer Discretionary Index ETF FDIS

This fund tracks the MSCI USA IMI Consumer Discretionary Index. The product amassed $1.61 billion in its asset base. It charges 8 bps in annual fees from investors and carries a Zacks ETF Rank #2 with a Medium-risk outlook (read: 5 Top-Ranked ETFs Looking Good Following the September Slump).



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Consumer Discretionary Select Sector SPDR ETF (XLY): ETF Research Reports

 

Vanguard Consumer Discretionary ETF (VCR): ETF Research Reports

 

Fidelity MSCI Consumer Discretionary Index ETF (FDIS): ETF Research Reports

 

First Trust Consumer Discretionary AlphaDEX ETF (FXD): ETF Research Reports

 

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Zacks Investment Research