Signs of steady recovery in the U.S. economy are now pretty evident, thanks to a solid labor market, manufacturing activity and retail sales. Decent inflation, President Trump’s fiscal reflation and stabilization in the oil patch translated into a super summer American market rally. Wall Street has been pretty steady in June (read: 5 ETFs to Buy at 52-Week High).
Time to Play the Wealth Effect?
The S&P 500, the Dow Jones Industrial Average and the Nasdaq Composite have added about 3.7%, 3.2%, and 5.8%, respectively, in the past month (as of Jun 6). A $65-oil, signs of ebbing trade tensions and a flurry of strong economic data points pushed the indexes higher. If the ascent is maintained, a wealth effect can be realized.
As per Investopedia, “the wealth effect helps to power economies during bull markets. Big gains in people's portfolios can make them feel more secure about their wealth and their spending.” Rising consumer confidence and spending should translate to broad-based economic growth.
Notably, U.S. consumer confidence increased in May to a three-month high bolstered by a healthy job market. After all, unemployment rate dived to an 18-year low. Manufacturing PMI increased to 58.7 in May 2018, surpassing April’s PMI of 57.3 and market expectations of 58.1.
In this kind of a growing economy, most sectors surge on a wealth effect, with a few of the more cyclical corners making the most of this run-up (read: 4 Sector ETFs to Profit From Strong May Jobs Data).
Definitely, economic optimism will bring about the Fed policy tightening talks. Many fear that stocks may slip due to gradual creases in cheap dollar inflows. But, in reality, this may not happen for cyclical sectors as these remain steady in a rising rate environment.
The technology sector is on a tear lately. Emerging new technologies like cloud computing, big data and Internet of Things are expected to drive the sector. So, investors can definitely play Zacks Rank #2 (Buy) Technology Select Sector SPDR Fund (XLK - Free Report) (read: Microsoft Shares Touch Triple Digits: 5 Tech ETFs to Bet On).
A small-cap consumer discretionary ETF can be considered a barometer of rising income levels of consumers of an economy. These pint-sized stocks do not have much exposure in foreign lands and are thus unaffected by the dollar strength. Plus, small-cap stocks are likely to benefit the most from the tax reform. So, one can bet on PowerShares S&P SmallCap Consumer Discretionary Portfolio (PSCD - Free Report) (read: Here's Why the Rally in Retail ETFs Will Continue in 2H).
An industrial boom is apparent in the U.S. economy due to the narrowing wage differential between developed and emerging economies, moderate strengthening of the U.S. dollar against a basket of emerging currencies and President Trump’s efforts for bringing back manufacturing jobs to America. First Trust RBA American Industrial Renaissance ETF (AIRR - Free Report) could thus be a great pick.
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