According to the “second estimate” of the U.S. Department of Commerce, first-quarter output of goods and services increased at an annual rate of 0.8%, higher than the earlier estimated 0.5% rise. Though the GDP growth rate came in below the consensus estimate of a 0.9% rise, the report showed that the U.S. economy expanded at a faster rate than the previous estimate.
Healthy growth in consumer spending and residential investment played a major role in boosting the economy during the first quarter. Meanwhile, recovery in corporate profits and strong increase in disposable personal income (DPI) also emerged as bright spots in the GDP report. Against this backdrop, fundamentally strong mutual funds from sectors that are likely to benefit from this improving scenario can be considered profitable for one’s portfolio.
Factors Behind Q1 GDP Growth
Consumer spending, which remained one of the main contributors to the steady growth in the U.S. economy over the past few quarters, continued to witness healthy increase. Even though the estimate remained unchanged, personal consumption came in at a healthy 1.9% for the first quarter, preceded by a 2.4% gain in the fourth quarter. It contributed nearly 1.3 percentage points in the first-quarter GDP number.
Another bright spot that led to first-quarter growth is residential investment. Expenditure on residential construction jumped 17.1% compared with the earlier estimate of 14.8%. This was the largest such increase in around four years. It had also made a significant contribution of around 0.6% to GDP, rising from fourth quarter’s contribution of 0.3%.
Separately, corporate profits, which were being affected by a strong dollar and sluggish global demand over the past few quarters, witnessed a rebound in the first quarter. According to the report, profits from current production rose $6.5 billion during the quarter after witnessing a decline of $159.6 billion in the fourth quarter. Moreover, after-tax profit, which declined $127.4 billion in the fourth quarter, also saw as increase of $8.1 billion during the first.
The report also showed that DPI surged 4% in the first quarter, higher than a 3.3% rise reported in the fourth. It was the highest increase in more than a year. Moreover, gross domestic income rose 2.2% last quarter compared with increases of 2% and 1.9% in the third and fourth quarters, respectively.
Sectors to Get Benefited
Two sectors that can gain from this favorable economic environment:
Impressive growth in consumer spending and favorable rise in income are boons for the retail sector, which attracts a major part of consumer expenditure. The U.S. retail sales rose 1.3% in April, the biggest gain since Mar 2015. Also, the “core retail sales” figure that excludes cars, petrol, building materials and food services gained 0.9% in April, the highest since Mar 2014. Meanwhile, the final reading of the consumer sentiment index released by the University of Michigan came in at 94.7 in May to touch an 11-month high.
According to the Labor Department, CPI increased 0.4% in April, the biggest gain since Feb 2013. This surge in consumer prices took the year-over-year increase to 1.1% in April, up from 0.9% in March. The core-CPI, which excludes food and energy prices, also advanced 0.2% in April after gaining 0.1% in March. Over the past one year, core prices went up 2.1%. This resulted in the fifth successive month of annual growth above the 2% mark, the longest such streak in four years. This rise in inflation level indicates that demand is increasing, which may also have a positive impact on the retail sector.
Record increase in expenditure on residential construction along with currently released encouraging housing data indicate that the real-estate sector is on a solid footing to witness a healthy growth environment in the coming months. Among the encouraging housing data, sales of new single-family homes rose 16.6% in April on the back of strong housing demand and traffic.
Moreover, existing home sales rose for the second straight month in April, per data released by the National Association of Realtors. The U.S. housing starts rose 6.6% from a revised March number to an annual rate of 1,172,000 in April, surpassing market expectations. The number of building permits — a gauge of future construction — also rose 3.6% in April.
4 Top-Ranked Funds to Buy
We have selected two mutual funds each from retail and real estate sectors that carry a Zacks Mutual Fund Rank #1 (Strong Buy). We expect these funds to outperform their peers in the future. Remember, the goal of the Zacks Mutual Fund Rank is to guide investors to identify potential winners and losers. Unlike most of the fund-rating systems, the Zacks Mutual Fund Rank is not just focused on past performance, but also on the likely future success of the fund.
Moreover, these funds have encouraging year-to-date, three-year and five-year annualized returns. They also have the minimum initial investment within $5000, low expense ratios and no sales load.
Fidelity Select Retailing (FSRPX - Free Report) invests a large chunk of its assets in common stocks of firms involved in merchandising finished goods and services to consumers. Annual expense ratio of 0.80% is lower than the category average of 1.41%. FSRPX has year-to-date, three-year and five-year annualized returns of 0.7%, 17.8% and 18.6%, respectively.
Fidelity Select Consumer Staples Portfolio (FDFAX - Free Report) invests the lion’s share of its assets in securities of companies throughout the globe that are involved in operations related to the consumer staples sector. Annual expense ratio of 0.76% is lower than the category average of 1.20%. FUSEX has year-to-date, three-year and five-year annualized returns of 4.8%, 8.4% and 11.6%, respectively.
Goldman Sachs Real Estate Securities IR (GRETX - Free Report) invests a major portion of its assets in equity securities of companies from the real estate domain. Annual expense ratio of 1.01% is lower than the category average of 1.29%. GRETX has year-to-date, three-year and five-year annualized returns of 4.4%, 8.3% and 10.4%, respectively.
VY Clarion Real Estate S (IVRSX - Free Report) invests a large chunk of its assets in equity securities including common and preferred stocks of domestic real estate companies, including REITs. Annual expense ratio of 0.96% is lower than the category average of 1.29%. IVRSX has year-to-date, three-year and five-year annualized returns of 4%, 8% and 9.8%, respectively.
About Zacks Mutual Fund Rank
By applying the Zacks Rank to mutual funds, investors can find funds that not only outpaced the market in the past but are also expected to outperform going forward. Learn more about the Zacks Mutual Fund Rank at https://www.zacks.com/funds.
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