The effects of lower oil prices will take a while to trickle through the economy, but consumer sector stocks and related exchange traded funds may have already priced in the potential boost to spending.
Year-to-date, the Market Vectors Retail ETF (NYSEArca: RTH) advanced 4.9% and Consumer Discretionary Select Sector SPDR (NYSEArca: XLY) increased 3.8%, compared to the SPDR S&P 500 ETF (NYSEArca: SPY) rise of 2.2%. The consumer-related ETFs are hovering around all-time highs. [Retail, Discretionary ETFs Race to All-Time Highs]
RTH now trades at a price-to-earnings ratio of 21 and XLY has a P/E of 18.4, whereas SPY is showing a 17.3 P/E.
Oppenheimer Funds’ Alec Young argues that it typically takes a while to upwardly revise areas that receive a boost from lower crude oil prices, such as retail and discretionary consumer goods, reports Tom DiChristopher for CNBC.
“We actually think there could be an upward bias in earnings estimates as we move through the year if in fact oil has bottomed,” DiChristopher said on CNBC.
Some companies may already be enjoying a windfall from the increased consumer spending. For instance, Wal-Mart’s (NYSE: WMT) recent decision to raise wages for some 500,000 employees could help support the case for positive corporate earnings outlook since wage growth is a significant driver of margins. WMT makes up 10.9% of RTH.
Moreover, the improving economic outlook and expanding job market are also lifting consumer confidence. The Bloomberg Consumer Comfort Index’s monthly economic expectations gauge inched up 1 point to 54 over January, its highest level in four years, Bloomberg reports.
Consumer spending has been steadily rising as oil prices declined. Spending rose 4.3% over the fourth quarter, the fastest since the first quarter of 2006, and accelerated from the third quarter’s 3.2% rate, Reuters reported.
“The level of consumer sentiment supports our view that consumer spending will kick the year off on a robust foot after the drop in energy prices left consumers’ wallets full,” Bricklin Dwyer, an economist at BNP Paribas, said in the Reuters article.
Market Vectors Retail ETF
For more information on the consumer sector, visit our consumer discretionary category.
Max Chen contributed to this article.