Investors may be stuck on the negatives as markets trip at the start of the new year. However, there may be some opportunities in consumer-related sectors and exchange traded funds.
“Consumer spending and homebuilding look poised for solid growth in 2016,” First Trust Portfolios economists, led by Chief Economist Brian S. Wesbury, said in a research note.
Real, or inflation adjusted, consumer spending was up 1.5% to 2.0% in the fourth quarter while home building likely expanded at a robust 9% rate, according to FTPortfolios.
Additionally, consumers’ financial obligations – the share of their after-tax incomes needed to make recurring payments – is at the lowest levels since the early 1980s. Job growth, mildly rising wages and lower energy costs are also supporting consumers.
Investors can capitalize on a turnaround in consumer spending through discretionary sector-related ETFs. For instance, the First Trust Consumer Discretionary AlphaDEX Fund (NYSEArca: FXD) takes a smart-beta approach to stock selections, targeting growth factors including three, six and 12-month price appreciation, sales to price and one year sales growth, along with value factors including book value to price, cash flow to price and return on assets.
Alternatively, there are a number of broad, traditional beta-index ETFs, including the Consumer Discretionary Select Sector SPDR (NYSEArca: XLY), Fidelity MSCI Consumer Discretionary Index (NYSEArca: FDIS) and Vanguard Consumer Discretionary ETF (NYSEArca: VCR).
Meanwhile, homebuilders are still on the road to full recovery. While housing starts jumped to about 1.1 million homes last year, fundamentals like population growth and so-called scrappage suggest a normal rate of 1.5 million new homes, according to the First Trust economists.
Investors can track the homebuilder space with the SPDR S&P Homebuilders ETF (NYSEArca: XHB) and the iShares U.S. Home Construction ETF (NYSEArca: ITB). The two homebuilder ETFs also include a significant tilt toward consumer discretionary or retail names. For instance, XHB tracks 14.5% home furnishing retail, 10.7% home furnishings and 6.0% household appliances. ITB includes 8.8% home improvement retail and 4.4% home furnishings.
After the recent selling pressure, investors who have extra cash on hand may find that that it is now an opportune time to invest on the cheap.
“US equities were relatively cheap before 2015 started and even cheaper today,” First Trust economists said. “We recommend keeping a stiff upper lip, and waiting for pessimistic investors to realize their mistake. Even with more rate hikes coming, the US stock market is still significantly undervalued.”
Max Chen contributed to this article.