Should Consumer ETFs Fear U.S.-China Trade Clash At All?

Americans are slowly gaining confidence in the economy as evident from the latest data from the Conference Board, which recently said that consumer confidence index increased to 129.2 in April, from 124.2 in March. The index, tracking the month through Apr 18, measures consumers’ perception about the current economic conditions and their expectations for the next six months. Both had an uptick in April.

Respondents of the survey that called business conditions “good” increased to 37.3% from 34.7% in April. The short-term outlook also perked up, with the percentage of consumers expecting business conditions to improve in the next six months rising to 19.9% from 17.2%.

Investors should note that consumer spending took a beating in the first quarter, having grown by a mere 1.2%. But though consumer spending slowed materially in the first quarter from 2.5% growth seen in the fourth quarter of 2018, according to PIMCO, the decline was due to factors including delayed tax refund payouts as a result of the government shutdown at the start of the year. PIMCO also expects consumer demand to “likely rebound” in the second quarter.

Upbeat Reading for Consumer Spending Expected for Second Quarter?

Already, personal consumption expenditures picked up 0.9% March. This was the largest monthly increase registered since August 2009. The surge was primarily due to higher spending on motor vehicles and healthcare. In comparison, personal consumption expenditures increased only 0.1% in February.

As a matter of fact, retail sales also staged their largest increase in 18 months in March, giving further evidence to forecasts of a pickup in consumption in the second quarter. The rise in real consumer spending once again points toward a likely pickup in the second quarter.

What Could Drive Spending?

Subdued inflation has been instrumental in driving consumer spending. The Federal Reserve’s preferred underlying inflation gauge slackened to a one-year low in March. Job growth rebounded in March as employers added a solid 196,000 jobs. The U.S. unemployment rate remained at 3.8%, near the lowest level in almost 50 years, per the government data.

And last but not the least, a dovish Fed and the resultant low rates will likely work wonders for consumer spending. Fed officials also slashed the interest paid on excess reserves by 5 basis points to 2.35%, effective May 2. This may incite commercial banks to lend more money to consumers and in turn boost spending.

If investors are worried about the U.S.-Sino trade battle and its evil impact on consumer spending, they may rely on the Fed to act. Atlanta Fed President last week said the central bank might have to slash interest rates if the consumer spending dip as a result of increased U.S. tariffs on some Chinese goods from May 10.

ETFs in Focus

Against this backdrop, below we highlight a few consumer-oriented ETFs that could gain on upbeat consumer confidence and signs of improving spending. These funds are Fidelity MSCI Consumer Discretionary Index ETF FDIS, Consumer Discretionary Select Sector SPDR Fund (V:XLY) , ProShares Online Retail ETF ONLN, Vanguard Consumer Discretionary ETF (HN:VCR) and SPDR S&P Retail (NYSE:XRT) ETF XRT (read: What Sell in May? Buy These ETFs Instead).

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