Should You Buy Retail ETFs Despite Soft Sales?

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Includes: PMR, RTH, XRT
by: Zacks Funds

Stronger March jobs data raised optimism on the U.S. growth momentum, but retail sales for the month washed away all hopes. March data was down 0.3% sequentially as four of the key 13 areas reported declines and two areas were flat, per tradingeconomics.

The data fell short of economists' expectation of 0.1% growth. Sales excluding auto nudged up 0.2%, following an upwardly revised 0.1% expansion in February. Auto sales declined 2.1% in the month. And this was largely expected as total vehicle sales tumbled to 16.57 million in March from 17.54 million in February 2016. Among the other losers, sales at clothing, food services and drinking places lost 0.9%, 0.8% and 0.1%, respectively.

The result was a disappointment when compared with February's no gains. It seems that the U.S. economy is taking root, albeit slowly, and consumers saved a considerable amount from low fuel prices, but these savings are hardly being spent at stores. This proves that the last recession is still fresh in the memory of consumers, who are extra cautious about loosening their purse strings for discretionary purchases.

Moreover, oil prices recovered somewhat in March on hopes of output tightening and a dimmer dollar. As a result, consumers' oil savings must have also fallen slightly. Whatever the case, since consumer spending makes up about 70% of the U.S. GDP, this blow to retail sales remains a matter of concern. In fact, this stoked fears of a lackluster Q1 GDP in investors' minds.

We believe that the recent uptrend in oil prices in the U.S. caused consumers to be wary of spending. After all, U.S. inflation and commodity prices are slowing rising, thereby lowering investors' savings.

ETF Impact

All the three retail ETFs - SPDR S&P Retail ETF (NYSEARCA:XRT), Market Vectors Retail ETF (NYSEARCA:RTH) and PowerShares Dynamic Retail Portfolio (NYSEARCA:PMR) - added gains despite the downbeat retail sales data. Following the release of the data on April 13, 2016, XRT, RTH and PMR added over 2.7%, about 1.1% and 1.8% respectively.

It seems that investors downplayed the data and wagered on a broader market recovery. Despite a moderate first quarter, many economists are hopeful of a rebound in overall consumer spending, going forward, thanks mainly to wage gains, per Wall Street Journal.

Also, a dovish Fed may act as tailwind in the future trading of these retail ETFs as a few more months of cheap dollar should boost consumers' purchases as well as the investing world.

And those who have been caught off guard by this soft sales data may wait for another month before drawing a conclusion on the momentum level in the U.S. economy. March sales suffered as it saw an unexpected ascent in energy prices. Things may settle down over the coming months.

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