U.S. Stock ETFs: Reflection Of Consumer Sentiment?

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Includes: SPY
by: Tom Lydon

Exchange traded funds tracking the major U.S. equity benchmarks are struggling to break free of the trading range since the summer correction. Stocks appear to be stuck in the doldrums along with consumer sentiment.

“Consumer confidence hovered last week near a record low as Americans turned more pessimistic about the state of the U.S. economy,” Bloomberg reported Thursday.

The Bloomberg Consumer Comfort Index fell to minus 50.8 in the week ended Oct. 9 from 50.2 the prior period. “It was the fourth consecutive reading lower than minus 50, something that has happened just three previous times in its 26- year history,” according to the report.

According to the minutes of the latest Federal Reserve meeting, consumer sentiment “deteriorated significantly further in August and stayed downbeat in early September,” while activity in the housing market remained depressed. The new 2010 census figures showed home ownership saw the biggest decline since the Great Depression, the Associated Press reported.

Major stock ETFs such as SPDR S&P 500 (NYSEARCA:SPY) are trying to break their recent trading range. Worries over the eurozone debt crisis and overall stock market volatility has kept many individual investors on the sidelines.

“It will still be hard for investors to focus on fundamentals this week with Washington showing little sign of budget compromise and Europe focused on protecting its banks, rather than attacking the deep recession in Greece that is threatening them. However, so far, the U.S. economy and corporate earnings seem to be weathering these distractions better than the markets, which should give us some hope of an improvement in the stock market before the end of the year,” David Kelly, chief market strategist for JP Morgan Funds, wrote in a report.

Analysts are expecting a reading of around 60 for the Reuter’s/University of Michigan’s consumer sentiment index this Friday, up slightly from September.

On Friday, investors will also be looking for data on retail sales.

“As we approach the shoulder of the holiday season, there is some positive movement in retail,” Ed Farrell, director of the Consumer Reports National Research Center, said, on Financial Planning. “However, a strong holiday season will depend on consumers having clear signs that the economy is on the mend, which to this point has been lacking. Weak employment, financial difficulties and poor confidence overall continue to present a powerful headwind for holiday sales.”

Some contrarian investors see the pessimism as a reason to buy stocks. Sentiment is low enough to be encouraging, Ned Davis Research, an institutional investment advisor, noted earlier last month, reports USA Today.

SPDR S&P 500

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Tisha Guerrero contributed to this article.

Full disclosure: Tom Lydon’s clients own SPY.