Signs of a cooling economy during the month of August can help substantiate the Federal Reserve’s decision to cut interest rates. In turn, this could uplift a pair of leveraged exchange traded funds that focus on consumer spending.
The change won’t be immediate, as noted by a report from the National Retail Federation. But when it does take effect, traders may want to explore opportunities in the retail sector as borrowing costs decline.
“Going forward, lower interest rates should benefit households that are under financial pressure from loans they have taken on to meet everyday needs,” the NRF noted. The report added that lower interest rates “will also make it more affordable for consumers to borrow money through mortgages, home improvement loans, car loans and credit cards, which can encourage spending and increase demand for goods and services.”
During the month of August, inflation declined to its lowest level since February 2021, according to the Labor Department. The 12-month inflation rate is currently at 2.5%, getting closer to the Fed’s target level of 2%.
Much of the capital markets are anticipating that a rate cut will happen this month and that potentially more will come before the year closes. That should bode well for the retail sector.
“The Fed is widely expected to cut rates at least twice this year, and the easing of interest rates should provide support to interest-sensitive sectors going into the fall and winter,” the NRF added. “That, in turn, should improve the outlook for many financially constrained households. While consumers will continue to be savvy about their purchases, these factors are a welcome development and should support their propensity to spend.”
2 ETFs to Consider
With falling rate cuts, the increased ability to spend could translate to stronger retail and consumer discretionary spending. If that’s the case, Direxion has a pair of leveraged ETFs to build off that bullish notion.
On one hand, consider the Direxion Daily Retail Bull 3X ETF (RETL ). The fund seeks daily investment results of 300% of the daily performance of the S&P Retail Select Industry Index. The top three subsectors in terms of exposure in the index are automotive, specialty, and apparel retail.
Additionally, traders can consider the Direxion Daily Consumer Discretionary Bull 3X ETF (WANT ) to play off increased consumer discretionary spending. The fund seeks daily investment results equaling 300% of the daily performance of the Consumer Discretionary Select Sector Index. The index’s top three weightings include broadline retail, hotel/restaurant/leisure, and specialty retail.
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