What’s Happening to Retail and the Consumer?

ETFs, Profit from the Headlines

Consumer sentiment dropped to a nine month low on Friday as the August University of Michigan Consumer Sentiment widely missed expectations and dropped to 79.2 from last month’s 81.8.

The report came on the heels of Wednesday’s July retail sales report which was also a disappointment. Although economists were expecting an increase of 0.2 percent, the report indicated that retail sales remained unchanged in July. After June’s 0.2 percent increase, July brought the lowest reading since January. After excluding sales of automobiles, gasoline and building materials, so-called “core” retail sales increased by 0.1 percent, falling short of the 0.3 percent expected by economists.

The weak retail sales data came as a surprise to those of us who read the August 4 report from the Gallup Organization, based on the results of its poll which indicated that self-reported consumer spending during the month of July was $94 – compared with $91 during June and the $89 average during July of 2013. Nevertheless, during May, consumer spending averaged $98 – a level which has not been reached since September of 2008. Gallup concluded that although there have been some small changes in the monthly readings, the trend since early 2012 has been one of increased consumer spending.

The impact of consumer spending on stock prices is best demonstrated by the quarterly earnings reports released by retailers.

Middle class bellwether Wal-Mart (WMT) reported second-quarter earnings of $1.21 per share, consistent with analysts’ expectations, although the company lowered its full-year earnings guidance from $5.15 per share to $4.90, blaming Obamacare.

Target (TGT) is scheduled to report earnings on August 21. During the first quarter we saw a slight miss, as earnings reached only 70 cents per share, compared with estimates of 71 cents. Revenue was $17.05 billion, coming in a tad higher than the estimated $17.02 billion, although the company provided downbeat guidance.

Macy’s (M) reported second-quarter earnings of 80 cents per share, missing estimates of 86 cents per share. Its revenue was $6.27 billion, falling short of the estimated $6.30 billion.

Nordstrom, Inc. (JWN) reported second-quarter earnings of 95 cents per share, beating estimates of 94 cents per share. Its revenue was $3.3 billion, falling a tad short of the estimated $3.39 billion. The company provided positive earnings guidance.

On August 14, JC Penney (JCP) reported a less-bad second-quarter loss of 56 cents per share, beating the estimated loss of 94 cents per share. At $2.80 billion, its second-quarter revenue slightly exceeded the estimated $2.78 billion.

xrtThe chart of SPDR S&P Retail ETF (NYSEARCA:XRT) demonstrates the recent choppy action in the sector as it consolidates below recent highs.

With all of the action in the retail sector, investors and traders could find opportunity in this important sector. A number of exchange traded funds offer exposure to both the retail and consumer sectors:

SPDR S&P Retail ETF (NYSEARCA:XRT) – This ETF tracks the S&P Retail Select Industry Index. For the past month, XRT has been holding in a range between its 200-day moving average (currently $84.41) and its 50-day moving average (currently $85.48).

SPDR Consumer Discretionary ETF (NYSEARCA:XLY) – This ETF tracks the consumer discretionary sector via the Consumer Discretionary Select Sector Index.

SPDR Consumer Staples ETF (NYSEARCA:XLP) – This ETF tracks the Consumer Staples Select Sector Index and includes companies in household products, tobacco and beverages.

Direxion Daily Retail Bull 3x Shares ETF (NYSEARCA:RETL) – This leveraged ETF is designed to deliver 300% of the daily performance of the Russell 1000 Retail Index.

ProShares UltraShort Consumer Services ETF (NYSEARCA:SCC) – This ETF is designed to move at twice the inverse (-2x) of the daily performance of the Dow Jones U.S. Consumer Services Index by investing in derivatives.

ProShares UltraShort Consumer Goods ETF (NYSEARCA:SZK) – This ETF is designed move at twice the inverse (-2x) of the daily performance of the Dow Jones U.S. Consumer Goods Index.

The consumer outlook is a key component of the U.S. economy and action in the retail and consumer sectors is worth watching as these are typically leading indicators of future economic action.