It might not get much attention, but the Institute for Supply Management (ISM) Service Sector Report can be a useful tool for the Federal Reserve and exchange traded fund (ETF) investors. In August, the ISM index dropped from 55.8 to 54.8, which is the lowest reading since March of this year, says Gary Gordon for ETF Expert. In general, any number above 50 indicates the economy is expanding, but 54.8 is a minimal rate. So what could kick up the expansion number? Another rate cut.

Gordon thinks the Fed is leaning toward that direction. The Fed’s most recent statement on the state of the economy was, "The tightening of credit conditions has the potential to intensify the housing correction and to restrain economic growth more generally." The Fed seems to indicate that its concerned with growth here, and if so, the way to promote growth is through slowly easing interest rates. Adding to the pressure for another rate cut is the negative housing market data that just keeps coming.

If another rate cut occurs, financials and consumer services could benefit. Banks can make money off more loans and consumers can have more money to spend. Some financial and consumer services and their performance year-to-date include:

  • Financial Select Sector SPDR (XLF) – down 2.3%
  • iShares S&P Global Financials (IXG) – up 2.0%
  • iShares Dow Jones U.S. Financial Sector (IYF) – down 2.5%
  • Consumer Discretionary SPDR (XLY) – down 1.7%
  • Vanguard Consumer Discretionary ETF (VCR) – up 0.5%

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.