Coming into Tuesday, the Consumer Discretionary Select Sector SPDR (NYSEArca: XLY) was the best performer among the nine sector SPDR exchange traded funds on a year-to-date basis. However, investors looking to avail themselves of the consumer spending theme are likely to encounter rich valuations.
“Firms in the sector have become leaner in the years since the financial crisis, although we question the big uptick in margins implied by consensus estimates for 2015-16, especially as savings at the gas pump aren’t being spent elsewhere. Valuation multiples have traded in a fairly narrow range over the past year — see the P/E ratio — but the sector remains richly valued versus the S&P500 in our opinion,” said AltaVista Research of XLY in a recent note. http://www.altavista-research.com/
However, stagnant wage growth could impeded U.S. consumption and cause the consumer sectors to slow down. Household consumption currently makes up about 68% of gross domestic product, and market observers expect it will rebound to a 3% annualized growth rate in the second half, writes BlackRock Strategist Russ Koesterich for the Financial Times.
Regrettably, consumption growth remains slow. Over the 60 years between 1947 and 2007, annual real household consumption grew by 3.6% on average, whereas real consumption only grew 1.5% since 2008, or 2.3%, excluding the recession
Still, there are some catalysts for discretionary ETFs, such as XLY, including the rising minimum wage. Meanwhile, a growing segment of America is calling for higher minimum wages across the government after years of stalled efforts. The national minimum wage has been set at $7.25 per hour since 2009, and changes would require the support of the Republican-controlled Congress.
A number of research has pointed to improved economic conditions from higher wages. For instance, in a 2011 study by the Chicago Federal Reserve, the author found that for ever dollar increase in minimum wage, a worker’s household added $2,800 in new consumer spending over the following year.