The dual forces constituting the Russia-Ukraine conflict and the surging inflationary levels are weakening the U.S. consumer sentiment levels. The rising commodity prices due to the war crisis are increasing the struggles of consumers. The latest disappointing consumer sentiment final reading for March that slipped to the lowest level in about 10 years highlights the same.
The University of Michigan’s consumer sentiment index dropped to 59.4 in March from the preliminary reading of 59.7 issued earlier in the month. The metric lagged the economists’ expectations who were estimating it to remain unchanged, per a Bloomberg’s survey.
The discouraging consumer sentiment reading might affect the consumer discretionary sector, which attracts a major portion of consumer spending amid the rising inflation levels. Certain ETFs that can feel the impact are
The Consumer Discretionary Select Sector SPDR Fund ( XLY Quick Quote XLY - Free Report) , Vanguard Consumer Discretionary ETF ( VCR Quick Quote VCR - Free Report) , First Trust Consumer Discretionary AlphaDEX Fund ( FXD Quick Quote FXD - Free Report) and Fidelity MSCI Consumer Discretionary Index ETF ( FDIS Quick Quote FDIS - Free Report) .
The measure of current economic conditions dipped further to 67.2 in March from the reading of 67.8 reported earlier in the month. In March, a gauge of consumer expectations slid to 54.3.
One-year inflation is expected to rise to 5.4% in March (the highest since 1981) from 4.9% in the previous month (per a Reuters article). The survey's five-to-10-year inflation outlook remained at 3% in March.
The latest decline in the U.S. consumer sentiment levels is largely due to the deteriorating personal financial scenarios from the surging inflation levels along with declining confidence in the government's economic policies. The Russia-Ukraine tension escalated the gas and grocery item prices further, adding to consumers’ woes.
Commenting on the data, Surveys of Consumers chief economist Richard Curtin reportedly said that "Inflation has been the primary cause of rising pessimism. Inflation was mentioned throughout the survey, whether the questions referred to personal finances, prospects for the economy, or assessments of buying conditions."
Present U.S. Economic Scenario
Market gyrations have been a common phenomenon in 2022 so far. The Federal Reserve finally gave the nod on Mar 16 to the first rate hike of a 0.25 percentage since December 2018. At the same time, while taking an aggressive approach to increase the rates, the central bank informed about plans to increase the interest rates six times this year. The Federal Reserve is aiming at a consensus funds rate of 1.9% by 2022 end (per a CNBC article).
The Russia-Ukraine strife, inflation at a 40-year high and the Fed’s hawkish outlook for the interest rate are persistently adding to market insecurity. As the turbulence continues, rising commodity prices and fears of further disruptions in global supply-chain distributions might stoke higher inflation. Also, as the Federal Reserve took an aggressive approach to increasing the rates, market participants are worrying about the U.S. economy slipping into stagflation due to high-interest rates and steep inflation.
The surge in gasoline prices to record high levels hurt consumer sentiment. The latest dismal preliminary consumer confidence readings for early March that slipped to the lowest level in about 11 years highlight the same.
Meanwhile, the U.S. economic fundamentals have been staying strong to date. Despite disappointing U.S. consumer sentiment levels, consumer spending remained robust. Moreover, the labor market continues to improve. According to the Bureau of Labor Statistics, the U.S. economy added 678,000 jobs in February, beating economists’ expectations of 440,000 (per Dow Jones). The unemployment rate also dropped to 3.8%.
The Institute of Supply Management (ISM) reported that its manufacturing index for February rose to 58.6% from 57.7% in January, beating the consensus estimate of 57.7%. This marked the 21st successive month of growth for the U.S. manufacturing industry.
ETFs That Might Suffer
Here we discuss in detail 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 Quick Quote XLY - Free Report)
The Consumer Discretionary Select Sector SPDR Fund is the largest and the most popular product in the consumer discretionary space, with an AUM of $19.28 billion. XLY tracks the Consumer Discretionary Select Sector Index.
The Consumer Discretionary Select Sector SPDR Fund charges an expense ratio of 0.10%. XLY carries a Zacks ETF Rank #2 (Buy), with a Medium-risk outlook. Also, The Consumer Discretionary Select Sector SPDR Fund trades in a three-month average volume of 11.5 million shares (read:
5 ETF Areas Shining Bright as US Economy Looks Strong). Vanguard Consumer Discretionary ETF ( VCR Quick Quote VCR - Free Report)
Vanguard Consumer Discretionary ETF currently follows the MSCI US Investable Market Consumer Discretionary 25/50 Index.
Vanguard Consumer Discretionary ETF has an AUM of $6.13 billion and charges an expense ratio of 0.10%. VCR carries a Zacks ETF Rank #2, with a Medium-risk outlook. Also, Vanguard Consumer Discretionary ETF trades in a three-month average volume of about 163,000 shares (read:
ETFs to Win & Lose on the Likely First Rate-Hike Since 2008). First Trust Consumer Discretionary AlphaDEX Fund ( FXD Quick Quote FXD - Free Report)
First Trust Consumer Discretionary AlphaDEX Fund tracks the StrataQuant Consumer Discretionary Index, which employs the AlphaDEX stock-selection methodology to select stocks from the Russell 1000 Index.
First Trust Consumer Discretionary AlphaDEX Fund has an AUM of $1.60 billion. FXD charges 0.61% of annual fees and has a Zacks ETF Rank #3 (Hold), with a Medium-risk outlook. Also, First Trust Consumer Discretionary AlphaDEX Fund trades in a three-month average volume of about 282,000 shares.
Fidelity MSCI Consumer Discretionary Index ETF ( FDIS Quick Quote FDIS - Free Report)
Fidelity MSCI Consumer Discretionary Index ETF tracks the MSCI USA IMI Consumer Discretionary Index.
Fidelity MSCI Consumer Discretionary Index ETF amassed $1.46 billion in its asset base. FDIS charges 8 basis points as annual fees from investors and carries a Zacks ETF Rank #2, with a Medium-risk outlook. Fidelity MSCI Consumer Discretionary Index ETF trades in a three-month average volume of about 201,000 shares.