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Last week’s upbeat monthly employment report put the “rate hike” back on investors’ minds in time for the Fed’s next decision day coming up in mid-December.
October’s labor market report stole the headlines for good reasons, and volatile trading activity following the release resulted in big gains for some and steep losses for others. The consumer discretionary sector in particular didn’t move much in either direction, although it did fall into the spotlight in light of the latest wage data.
Closer Look at the Jobs Data
In October, the labor market added 271,000 jobs, and even more impressive, the average hourly earnings jumped from 0.2% to 0.4% on a month-over-month basis; furthermore, the gain in hourly earnings came in at 2.5% on an annual basis, marking the best year-over-year wage growth since July 2009.
Consider the following visualization from the WSJ:
Rising wages translates into inflationary pressures, which is why October’s jobs report re-ignited rate hike fears; more importantly, however, the wage growth data point suggests a possible strengthening in consumer spending, which could resonate well for companies operating under the consumer discretionary sector umbrella.
Sector Leaders & Laggards
If you think the latest jobs report is a signal to buy the consumer discretionary sector, you’re right…but awfully late! Consider the following YTD returns:
Consumer discretionary (XLY ) is the top-performing sector YTD by a very wide margin; on the other hand, energy (XLE ) and utilities (XLU ) have been the worst performers.
You always hear about how “the market is forward-looking”, and the above performance recap illustrates this quite clearly. Consumer discretionary stocks have been outperforming the broader market all throughout 2015 as investors have already been repositioning their portfolios in anticipation of strengthening consumer spending. In other words, the latest jobs report confirmed the assumption that many have had this year all along; that is, if employment conditions improve, it will result in increased consumer spending.
What to Consider Next
Now that the data is finally supporting the case for discretionary stocks, what is the average investor supposed to do, considering that this sector has already posted the best returns thus far this year? Two things to consider. First and foremost, it’s not too late to buy into this trend. That is to say, momentum is by nature self-sustaining, meaning that the top-performing sector can remain in the lead for longer than most would expect.
In other words, don’t be hesitant to buy something just because it has already gone up; chances are, if the fundamentals are supportive behind an asset class, it will continue to rise in price.
Second, not all corners of the consumer discretionary sector have fared well in 2015; this means that perhaps some of the laggards within the sector still have plenty of “room to run” so to say. Let’s examine this below.
Read more about Momentum Investing.
Ways to Play Consumer Discretionary ETFs
When we consider the YTD returns of consumer discretionary ETFs, there are a few funds that stand out.
The three best ETF performers, which are suited for a momentum-based trading strategy, are:
On the other hand, those willing to endure more volatility in anticipation of a steeper rebound ahead may want to consider the worst three consumer discretionary ETFs YTD:
Be sure to read more about How to Take Profits and Cut Losses When Trading ETFs.
The Bottom Line
The latest wage gains data suggest that consumer spending may strengthen, thereby improving the prospects for consumer discretionary ETFs. Investors who wish to establish exposure to this trend should be mindful that this sector has already raked in impressive returns YTD; while that’s not to say momentum will soon wane, investors looking to buy into the consumer discretionary sector would be wise to remain nimble, utilize stop-losses and take profits.
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