Consumer Discretionary Stocks: A 1-2 Punch for Profits

Sentiment is a strong force, and the recent improvement in consumer confidence could not have come at a better time for retailers and other consumer discretionary stocks as the holiday shopping season climaxes.

Retail Shopping

Last week, the Commerce Department reported a better-than-expected retail sales report, which comes on the heels of a robust job number. These two metrics come as gas prices have declined to the lowest levels since 2009, which in turn have driven sentiment to a seven-year high. The Thomson Reuters/University of Michigan’s U.S. consumer sentiment index rose in December to 93.8, the highest reading since January 2007 and above consensus forecasts of 89.5. Future expectations also rose to 86.1 from 79.9, also the highest since January 2007, and beating the 80.5 forecast.

Much of the increase in sentiment likely comes from the recent rapid decline in gasoline prices at the pump. According to the Department of Energy, The U.S. average retail price per gallon of regular gasoline has fallen 28% from its 2014 peak of $3.70 per gallon on June 23, to $2.68 per gallon on December 8, 2014.

Gasoline expenditures for the average U.S. household reached $2,912, or just under 4% of income before taxes, according to the Energy Information Administration. The last recorded estimate in 2012 occurred when gasoline prices averaged $3.70 per gallon. The recent decline in gasoline prices by nearly 30% over the past six months, has generated an approximate savings of approximately $1,000 per household.

Drivers now have extra cash in the pockets, which are bound to help consumer discretionary and broader retail stocks into year’s end.

To wit, increasing sentiment and more discretionary income in consumers’ pockets led to a boost in retail spending in November. According to the Commerce Department, retail sales climbed 0.7% month-over-month in November, which was the strongest gain in eight months. The largest beneficiary was auto sales, which likely gained substantially from the drop in gasoline prices. Auto dealers posted a 1.7% rise, while department stores and online retailers climbed 1% apiece.

Lower gasoline prices are only one factor in stronger sentiment. Job gains have recently picked up, allowing consumers to feel more secure about spending their paychecks. In November, employers added 321,000 jobs last month, according to the Bureau of Labor Statistics. Economists were expecting payrolls to rise by 230,000. A more telling statistic could be the increase in average hourly earnings, which increased by 0.4% and shows that people are seeing increases in their income.

With more money available for spending, consumer discretionary stocks should benefit. And retail gasoline prices will likely remain under pressure as inventories are at the upper end of the five-year range for this time of year.

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Source: Department of Energy

Two ETFs that will give you exposure to robust performance in the retail and discretionary sectors are the Market Vectors Retail ETF (RTH) and the Consumer Discretionary SPDR (ETF) (XLY). The RTH is a truer retail play, while the XLY is more broad based with holding which include entertainment content providers.

The RTH looks to replicate the price and yield performance of the Market Vectors US Listed Retail 25 Index. The largest holdings in this ETF are Wal-Mart Stores, Inc. (WMT), Amazon.com, Inc. (AMZN) and Home Depot Inc (HD). This ETF costs 0.35% in expenses, or $35 annually for every $10,000 invested.

Meanwhile, the XLY looks to correspond to the price and yield performance of securities in the Consumer Discretionary Select Sector Index and features top holdings like Walt Disney Co (DIS), Comcast Corporation (CMCSA) and Home Depot. Expenses for XLY are dirt-cheap at just 0.16%.

As of this writing, David Becker did not hold a position in any of the aforementioned securities.

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Article printed from InvestorPlace Media, https://investorplace.com/2014/12/consumer-discretionary-xly-rth/.

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