With the U.S. economy showing some signs of life and with the holiday shopping season not far, considering consumer cyclical stocks over the near-term could be a winning idea. It could also pay to embrace small caps from that sector with the  Invesco S&P SmallCap Consumer Discretionary (PSCD).

PSCD, which tracks consumer discretionary sectors from the S&P SmallCap 600 Index, offers investors a direct avenue for participating in economic recovery. Better yet, if Congress can get its act together and authorize another round of stimulus checks for Americans, PSCD would likely benefit.

“Consumer discretionary stocks offer a more direct way to profit from a recovery,” according to Morningstar. “Consumer spending plum­meted as the virus spread and businesses shuttered to flatten the curve. Even after things started to reopen, spending didn’t return to normal. The U.S. personal saving rate spiked in March and April this year and is still well above average.”

Pondering PSCD

Recent data points indicate there are opportunities in the consumer discretionary and housing sectors. The sector is one offering investors more gains. Recent performers that stood out have also been those that were previously hardest hit by the coronavirus-driven fallout in the markets.

“Given the impact of the coronavirus on consumer spending, it’s no surprise small-cap consumer discre­tionary stocks were particularly hard-hit during the sell-off earlier this year,” notes Morningstar. “What is surprising is how quickly that sector rebounded, recovering all its losses by mid-August. Yet, these businesses are still feeling the impact of consumers’ newfound frugality. PSCD’s holdings experienced an average 12.4% year-over-year decline in revenue, based on the most recent quarterly data available through August 2020.”

Believe it or not, things could have been worse for PSCD and since the worst-case scenario didn’t come to pass in terms of consumer spending, PSCD’s relative strength could augur well for the fund in the fourth quarter.

“However, the fund’s strong rebound despite this challenging environment suggests the market expects business to improve in the near term. This fund has strong momentum and likely more room to run if consumer spending increases as the economy recovers from the pandemic,” according to Morningstar.

With the Federal reserve having cut interest rates recently, and coronavirus concerns ebbing, there may be a decent chance for continued economic bolstering. The rebounding U.S. economy is expected to facilitate more gains for cyclical sectors, including consumer discretionary.

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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.