3 Mutual Funds To Buy As Consumer Spending Boost GDP

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Includes: FSCPX, FSRPX, PGCOX
by: Zacks Funds

According to the "third estimate" of the U.S. Department of Commerce, the economy expanded at a rate of 1.4% in the fourth quarter of 2015 compared with the earlier estimate of a 1% rise. Moreover, the growth rate was above the consensus estimate of 1% gain. For the full year, GDP rose at an annual rate of 2.4%, in line with the 2014 growth rate.

Thanks to consumer spending, which constitutes roughly 75% of the U.S. economy, GDP grew at a moderate pace in the fourth quarter despite weaknesses in the other major components of the economy. Steady growth in consumer spending is likely to have a positive impact on the retail sector, which attracts a major portion of consumer expenditure.

Given this scenario, mutual funds having significant exposure to this sector may provide an excellent investment opportunity to seeking returns from this positive trend.

Consumer Spending Boosting Economy

According to the GDP report, personal consumption expenditure grew at a pace of 2.4% in the fourth quarter, preceded by a 3% rise in the third. In 2015, consumer spending rose 3.1% - the highest rate of increase since 2005. While spending on goods rose at a rate of 3.7% in 2015, the same on services increased 2.8% during the same time frame. Personal consumption expenditure contributed nearly 1.7% and 2.1% to GDP during the fourth quarter and last year, respectively. Consistent improvement in labor market conditions remained one of the key drivers of consumer spending.

According to the latest data, the economy got a boost from 242,000 job additions in February, which exceeded January's revised figure of 172,000 by a wide margin. Unemployment remained in line with January's rate of 4.9%. Meanwhile, the GDP report showed that disposable personal income increased 2.3% in the fourth quarter, preceded by a 3.2% increase in the previous quarter. Also, it rose at a rate of 3.4% last year - the highest since 2006.

The low inflation rate also gave a significant boost to consumer spending. According to the report, the personal consumption expenditure index (PCE) rose at a six-year low pace of 0.3% in 2015. Excluding food and energy prices, the index rose 1.3% - the lowest since 2011.

Lingering Concerns

A massive slump in business profits emerged as one of the main concerns in the fourth quarter. After-tax profits plunged 8.4% during the quarter, witnessing the largest decline since the first quarter of 2014. This was preceded by third quarter's decline of 1.7%. After-tax profits slumped 5.1% last year, marking the biggest drop in the last seven years. Profits from current production plunged $159.6 billion last quarter, followed by a $33 billion decline in the third.

Moreover, business investment declined 2.1% during the fourth quarter, in contrast to a 2.6% rise in the previous quarter. It subtracted nearly 0.3 percentage points from GDP figure. It is speculated that rising wages and an improving labor market will have a negative impact on the profit margin.

Separately, exports declined 2.1% in the fourth quarter compared with a 0.7% rise in the third. Imports declined 0.7% in the last quarter. This is why net exports had a negative impact of more than 0.1% on the GDP number. Meanwhile, businesses witnessed a stock pile of $78.3 billion last quarter followed by $81.7 billion accumulated in the third quarter. This affected the GDP rate by more than 0.2 percentage points.

3 Mutual Funds to Buy

Despite these concerns, the consumer-driven U.S. economy managed to register a moderate rate of growth on the back of positive factors including favorable labor market conditions, a low inflation rate and the low interest rate environment. The Fed recently reduced its forecast for the number of rate hikes this year from four to two. In this favorable environment, the retail sector is expected to benefit from steady growth in consumer spending as it attracts a major portion of the total spending.

Against this backdrop, we highlight three retail focused mutual funds that carry either a Zacks Mutual Fund Rank #1 (Strong Buy) or #2 (Buy). We expect these funds to outperform their peers in the future. Remember, the goal of the Zacks Mutual Fund Rank is to guide investors to identify potential winners and losers. Unlike most of the fund-rating systems, the Zacks Mutual Fund Rank is not just focused on past performance, but also on the likely future success of the fund.

These funds have encouraging one-month and three-year annualized returns. The minimum initial investment is within $5000. Also, these funds have a low expense ratio.

Fidelity Select Consumer Discretionary Portfolio (MUTF:FSCPX) seeks growth of capital. This fund invests a large portion of its assets in securities of companies involved in the manufacture and distribution of consumer discretionary products and services.

Currently, FSCPX carries a Zacks Mutual Fund Rank #1. The product has one-month and three-year annualized returns of 3.9% and 13.5%, respectively. Annual expense ratio of 0.79% is lower than the category average of 1.41%.

Putnam Global Consumer A (MUTF:PGCOX) invests a large portion of its assets in securities of companies involved in the manufacture and distribution of consumer discretionary products and services.

Currently, PGCOX carries a Zacks Mutual Fund Rank #1. The product has one-month and three-year annualized returns of 5.4% and 10.7%, respectively. Annual expense ratio of 1.26% is lower than the category average of 1.43%.

Fidelity Select Retailing (MUTF:FSRPX) seeks capital growth. FSRPX invests a major portion of its assets in securities of firms involved in merchandising finished goods and services to consumers.

Currently, FSRPX carries a Zacks Mutual Fund Rank #2. The product has one-month and three-year annualized returns of 3.8% and 20.3%, respectively. Annual expense ratio of 0.81% is lower than the category average of 1.41%.

About Zacks Mutual Fund Rank

By applying the Zacks Rank to mutual funds, investors can find funds that not only outpaced the market in the past but are also expected to outperform going forward. Pick the best mutual funds with the help of Zacks Rank.

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