Weak Retail Sales Hurt These ETFs; What Lies Ahead?

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Includes: PMR, RTH, XRT
by: Zacks Funds

Are the U.S. consumers saving instead of purchasing? In an environment of strong job-market condition and plunging oil prices, the decline in December's retail sales raised concern about sluggish growth in consumer spending. It is speculated that consumers opted to put away the money they saved from crude slump instead of purchasing in huge volume during the holiday season.

According to the U.S. Department of Commerce, retail and food services sales declined 0.1% in December, while the consensus had estimated it would remain unchanged. It was preceded by an upwardly revised increase of 0.4% in November. Excluding auto sales, which remained flat last month, retail sales also declined 0.1%, in contrast to the consensus estimate of a 0.2% gain and November's increase of 0.3%. Meanwhile, retail sales increased 2.1% in 2015, its weakest year of sales growth since 2009. In the following section we will try to find out the probable reasons of the decline.

What Dragged Retail Sales Down?

Decline in clothing & clothing accessories stores sales emerged as the major drag in last month's retail sales. According to the report, sales in the segment declined 0.9% in December, compared to a 1.4% rise in November. It is speculated that the unfavorable weather in December, which was marked as the second hottest December since late 1800s, had a negative impact on sales of winter clothes and accessories.

Meanwhile, plunging crude dragged down gasoline stations' receipts by 1.1%, which also played an important role in pushing retail sales into negative territory. Also, a significant decline in sales in major components of retail sales including miscellaneous store retailers, general merchandise stores, food & beverage stores and electronics & appliance stores weighed on last month's retail sales.

Additionally, sales in motor vehicle & parts dealers, which played an important role in boosting retail sales for the most part of 2015, remained unchanged in December from the preceding month. Though U.S. light-vehicle sales increased 5.7% year over year to an all-time record of 17.47 million units in 2015, it failed to do enough for retail sales to post higher gains.

Market Impact

Decline in retail sales had a negative impact on the sector on Friday. ETFs from the retail space including SPDR S&P Retail ETF (NYSEARCA:XRT), Market Vectors Retail ETF (NYSEARCA:RTH) and PowerShares Dynamic Retail ETF (NYSEARCA:PMR) ended in the negative territory following the release of retail sales report. XRT, RTH and PMR lost 1.9%, 1.5% and 2.2%, respectively.

Will It Rebound?

Major factors including labor-market condition, oil prices, interest rate and inflation rate are in favor of a boost in retail sales this year. The economy witnessed the highest yearly pace of new job additions in 2015 with an average of 284,000 jobs added each month during the October-December period. Moreover, the unemployment rate held steady at a seven-year low of 5% for the third consecutive month.

Meanwhile, the continuous decline in oil prices, which are expected to slump further following the lift-off of Iran's sanctions, may also allow consumers to spend more. Slump in oil prices is also restricting the Fed to achieve its 2% inflation rate target.

Separately, the Fed is speculated to be more patient in hiking the key interest rate in the near term amid concerns of weak domestic economic growth and the prevailing sluggishness in the global growth environment. Recent dismal economic data indicated that the growth rate in the last quarter of 2015 may turn out to be slower compared to previous quarters. These factors may encourage consumers to boost both savings and expenditures, which may act as a major catalyst to propel retail sales this year.

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