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How Smart Investors Can Profit from Increased Consumer Spending
Daily Gains Letter publishes daily updates on personal finance, investment strategies and financial planning related topics.
As consumer spending in the U.S. economy improves, investors may be able to profit from exchange-traded funds (ETFs) like the Consumer Discretionary Select Sector SPDR (NYSEArca/ XLY) and consumer discretionary companies.
In the aftermath of the financial crisis, consumer spending in the U.S. economy stalled. The reasons behind it were obvious: there was a surge in foreclosures and rampant job cuts.
But consumers in the U.S. economy seem to be spending once again.
In June, retail and food services sales increased 0.4% over May to $422.8 billion. While this may sound minute, it makes the big picture clearer: consumer spending on retail and food services has increased 4.6% in the second quarter of this year compared to last year, and is up 5.7% from June of 2012. (Source: U.S. Census Bureau, July 15, 2013.)
Consumers are also buying cars again. In June, 1.4 million cars and light trucks were sold in the U.S. economy. At an annual pace of 15.96 million vehicles, June was the best month for car sales since November of 2007. Auto sales in the U.S. economy have increased nine percent from a year ago. (Source: Klayman, B. and Woodall, B., “U.S. auto industry posts best sales month since 2007,” The Globe and Mail, July 2, 2013.)
Consumer confidence is also increasing in the U.S. economy. Consider the chart below of The University of Michigan Consumer Sentiment Index. In June, consumer sentiment registered at 84.1—one of the best levels since late 2008.
Chart courtesy of www.StockCharts.com
Consumer confidence is one of the best indicators of consumer spending. Once the consumer feels confident, they think the economy is getting better, their jobs are better, and the future outlook is good, so they go out and spend.
What does it all mean for investors?
The companies that are closely related to the trends in consumer spending can profit the most. Once consumer spending in the U.S. economy picks up, sales increase and that eventually causes an increase in the profits and stock prices of these companies.
But while an increase in consumer spending in the U.S. economy certainly creates a profit opportunity for investors, they must know that there are some threats to it as well.
The jobs market in the U.S. economy is still weak. Yes, we have had some job creation but much of it has been part-time and temporary work. And that can have ripple effects in consumer spending. If those who go out and spend are working jobs that don’t pay them enough, they won’t be able to spend as much.
Investors need to be aware of the risks they have on hand. The consumer discretionary sector seems to have good potential, but it can change suddenly. Investors should make use of stops, so their losses aren’t as big if things don’t go according to plan; investors should always take some profits off the table, too—that is, if they have any.
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Source: http://www.dailygainsletter.com/investment-strategy/how-smart-investors-can-profit-from-increased-consumer-spending/1244/
