The effects of a strong U.S. dollar could soon trickle through to retail stocks and exchange traded funds as the downward pressure on inflation and cheaper foreign goods entice American consumers.
Cheaper oil has put more money into consumers’ pockets, bolstering retail ETFs. For instance, the Market Vectors Retail ETF (NYSEArca: RTH) advanced 5.4% year-to-date while the SPDR S&P Retail ETF (NYSEArca: XRT) rose and PowerShares Dynamic Retail Portfolio (NYSEArca: PMR) increased 3.2%. In contrast, the SPDR S&P 500 ETF (NYSEArca: SPY) has dipped 0.5% so far this year.
However, the next leg of growth in the retail space could come in the form of cheaper goods for consumers as the USD continues to appreciate. According to economists at Barclays Plc, Goldman Sachs Group Inc. and JPMorgan Chase & Co, the strong dollar will help lower costs for goods imported by American Companies and then in prices paid by consumers, reports Shobhana Chandra for Bloomberg.
“The energy price pass-through should begin to wane by the end of the first quarter,” Michael Gapen, the chief U.S. economist for Barclays, said in the article. “The peak drag from the dollar will come in the second and third quarters.”
Clothing, electronics and automobiles will likely see prices decline as the stronger dollar permeates the economy. The cheaper prices could help attract greater demand, bring more traffic into stores and bolster the retail space. For instance, XRT includes a 24.1% tilt toward apparel retail, 13.2% in automotive retail and 4.5% in computer & electronics.
“You can’t expect a better environment for consumers,” Gregory Daco, lead U.S. economist at Oxford Economics, said in the article.. Combined with cheaper fuel, “the stronger dollar is an additional layer of downward pressure on inflation.”
The price of imports is already showing the effects of a strong greenback, falling 0.7% in January, the largest decline outside of a recession in records going back to 2002. The core rate of inflation, which excludes fuel and food, only rose 1.3% in the 12 months through January, the smallest year-to-ear advance since March 2014.