How much longer can consumer oriented stocks defy gravity? Although the sector has been leading the surge in U.S. stocks, red flags abound. Let's analyze the headwinds facing this group.
Do stock market fundamentals matter anymore or is hopium still driving the car? S&P 500 companies (SPY - News) in the consumer discretionary sector (XLY - News) are projected to report Q1 earnings growth of just 8% according to Thomson Reuters data. Here's the problem: Just two months ago, Wall Street's analysts were forecasting EPS growth of 13% for this group and last October they were expecting an even higher 16% growth rate.
Nobody knows if 8% EPS growth is the right figure, but assuming it is, it would translate into the weakest growth rate for XLY over the past six quarters.
Cuts in Consumer Spending
An online poll of 1,538 people conducted March 4-8 by Reuters/Ipsos showed that two-thirds of Americans say they are reducing their monthly spending this year. And in case you're wondering, the remaining people surveyed are not increasing their spending. This is hardly a bullish backdrop for consumer stocks. (Just in February, we wrote about an internal memo at Wal-Mart describing how sales at the retail gaint were off to their worst start in 7-years.
For further evidence that consumers are being pinched by rising gas prices and the 2% hike in payroll taxes, fewer people are eating out.
At least three national restaurant chains - Olive Garden parent Darden Restaurants Inc (DRI - News) IHOP parent DineEquity Inc (DIN - News) and Chili's parent Brinker International Inc (EAT - News) - have said they are seeing fewer customers, according to a Reuters report. Also, people that are still eating out are spending less per visit.
Jobless Rate Still Double Digit
Contrary to widespread reports of improvement in the job market, there are no statistically significant declines in joblessness.
In February 2013, the seasonally adjusted U-6* jobless rate was 14.3% compared to a 2012 average of 14.7%.
Furthermore, the Economic Cycle Research Institute reported that "Year-over-year payroll jobs growth has fallen to an 18-month low, and year-over-year household jobs growth has fallen to a 16-month low."
*Although the news media regularly reports the U-3 headline figure and ignores the more robust U-6 figure, we regularly highlight the latter. The U-6 number is far more complete because it includes total unemployed, plus all marginally attached workers, plus total employed part time for economic reasons, as a percent of the civilian labor force plus all marginally attached workers.
U.S. Consumer Focused ETFs
The Consumer Discretionary SPDR ETF (XLY) owns 82 stocks within the S&P 500 that include automakers, consumer durables, apparel, hotels, restaurants, leisure, media, and retailers. This sector represents around 11.6% of the S&P 500 and includes companies like Amazon.com, Starbucks, and McDonald's.
The Consumer Staples SPDR ETF (XLP) owns 42 stocks within the S&P 500 that cover food and drug retailing, beverages, food products, tobacco, household products, and personal products. Holdings within the more defensive oriented XLP include Wal-Mart, Proctor & Gamble, and Coca-Cola. The sector represents around 10.74% of the S&P 500.
Inverse performing ETFs like the ProShares UltraShort Consumer Services ETF (SCC - News) and ProShares UltraShort Consumer Goods ETF (SZK - News) are designed to increase in value when consumer stocks fall. Both funds use daily leverage of -200%.
In summary, market irrationally can last over long stretches, but it never lasts indefinitely. Prudent investing means being ready.
The ETF Profit Strategy Newsletter uses relative strength analysis along with common sense technical analysis to provide a short, mid, and long-term forecast along with actionable buy/sell recommendations. This is how we identify key trend changes in the sectors as well as the broader markets.
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