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Retail Sales in Fine Fettle: ETFs to Watch

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Erasing all confusion arising from the glum job data for the month of May, U.S. retail sales grew 0.5% in May from April. The gain followed last month’s 1.3% rise. May retail sales beat economists’ forecast of a 0.3% rise (read: Dull U.S. Job Data Brighten These ETFs).

The straight two months of rise in retail sales despite the sudden rise in energy prices and shockingly downbeat job numbers is a nice surprise and speaks positively about the growth momentum of the U.S. economy.

Sales excluding auto nudged up 0.4%. As per tradingeconomics, sales growth was witnessed in nine out of the 13 major categories. Sales at gas stations (up 2.1%), sporting goods & music stores (up 1.3%), non-store retailers (1.3%) and food joints (up 0.8%) were the major growth drivers.

We believe, Memorial Day in May helped these categories to fare better. This is because people spend their summer holidays vacationing over the MemorialDay weekend. As per the AAA survey, 55% of Americans were supposed to hit the road thanks to the cheapest Memorial Day gas prices in 11 years. And a surge in travel will invariably translate into leisure and entertainment activities (read: Memorial Day Travel May See 11-Year High: ETFs in Focus).

Meanwhile, the University of Michigan indicated that its consumer sentiment index came in at 94.7 the final reading for the month of May, way higher than the reading of 89 recorded in the prior month. Though expectations are waning, the index is presently at the highest level since January 2007, as per tradingeconomics.

Market Impact

However, each of the three retail ETFs – SPDR S&P Retail ETF XRT, Market Vectors Retail ETF RTH and PowerShares Dynamic Retail Portfolio – lost despite upbeat retail sales data. Following the release of data on June 14, 2016, XRT, RTH and PMR shed about 0.3%, 0.5% and 0.4% respectively (read: Q2 Outlook For Retail ETFs).

It seems that the broad-based risk-off sentiments prevailing in the market are weighing on the performance of those retail ETFs. Higher chances of Brexit within a few days, uncertainty regarding the Fed’s next move and slowing global growth took the center stage in the market and investors put little attention to this reassuring retail data(read: Retailers Sink: Alarm Bell Ringing for ETFs as Q1 Unfolds?).

Road Ahead

Whatever the case, May retail sales data indicates that the U.S. economy is progressing at a decent clip to end Q2 (given that consumer spending makes up about 70% of the U.S. GDP) and is less likely to stagger like it did in Q1.

With this, market watchers may again start wagering on an earlier-than-expected Fed rate hike, though the other economic readings need to come in stronger for that. Notably, the market was abuzz with sooner-than-expected Fed hike speculation a few days back when the minutes from the April meeting turned hawkish.

Until the release of the May job data, investors mulled over Fed policy tightening bets and positioned their portfolio accordingly. However, better-than-expected retail sales may again trigger off those talks. Maybe the May job data was a discrete event and thus this month’s data should closely be studied before drawing a conclusion over the health of the labor market.

Investors should note that each of the three retail ETFs are Buy-rated now, with RTH having a Zacks ETF Rank #1 (Strong Buy), and XRT and PMR carrying a Zacks ETF Rank #2 (Buy).

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