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Retail Sales Back to Health; ETFs to Watch

Finally, the U.S. economy got a nice economic reading. Overall retail sales expanded 1.3% in April from March, representing the largest gain since March 2015. April retail sales beat economists’ forecast of a 0.8% rise. This came as a nice surprise as weaker-than-expected April’s job data gave investors a gloomy picture on the economic growth momentum a few days back (read: Mixed U.S. Job Data Put These ETFs in Focus).

Sales excluding auto nudged up 0.8%. As per tradingeconomics, sales growth was witnessed in 11 out of the 13 major categories. Sales at motor vehicle and parts (up 3.2%), gasoline stations (2.2%) and non-store retailers (2.1%) were the major growth drivers. Web-based shopping saw a surge in the month as online retailers came up with the strongest sales gain since June 2014.

Moreover, the University of Michigan indicated that its consumer sentiment index rose 6.8 points to 95.8 early May, marking the strongest reading since June.

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 (PMR) – lost despite the upbeat retail sales data. Following the release of data on May 13, 2016, XRT, RTH and PMR shed about 1.4%, about 1.2% and over 1.3% respectively. XRT gained slightly after hours of May 13 (read: Q2 Outlook For Retail ETFs).

It seems that scars of lackluster retail earnings are prominent in investors’ mind. And thus investors paid less attention to this reassuring data. Moreover, departmental stores like Nordstrom (JWN) shed big time on May 13 following earnings released on May 12, which took a toll on the retail ETFs.

In any case, department stores have been under pressure lately. Macy’s (M), Kohl’s (KSS),  J.C. Penney (JCP) and many others soured investors’ mood this earnings season (read: Retailers Sink: Alarm Bell Ringing for ETFs as Q1 Unfolds?).

Road Ahead

Whatever the case, April 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. In the first quarter, the economy grew just 0.5%. Wage gains probably helped in pulling off the April retail sales data to some extent.

In the future, a dovish Fed may act as a tailwind as a few more months of cheap dollar should boost consumers’ purchases as well as the investing world. 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.   

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). Since consumers splurged on restaurants and online shopping, investors can also look at Restaurant ETF (BITE) and First Trust Dow Jones Internet Index Fund (FDN), which focuses on online retailers like Amazon (AMZN) and eBay (EBAY) (read: Amazon Stock Pops on Stellar Q1 Results: ETFs to Benefit).

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SPDR-SP RET ETF (XRT): ETF Research Reports
 
PWRSH-DYN RETL (PMR): ETF Research Reports
 
VANECK-RETAIL (RTH): ETF Research Reports
 
THE-RESTAURANT (BITE): ETF Research Reports
 
FT-DJ INTRNT IX (FDN): ETF Research Reports
 
AMAZON.COM INC (AMZN): Free Stock Analysis Report
 
EBAY INC (EBAY): Free Stock Analysis Report
 
NORDSTROM INC (JWN): Free Stock Analysis Report
 
MACYS INC (M): Free Stock Analysis Report
 
KOHLS CORP (KSS): Free Stock Analysis Report
 
PENNEY (JC) INC (JCP): Free Stock Analysis Report
 
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