ETF Talk: Is Retail Out of Style?

Consumer spending always is a key factor in economic growth. Economists tell us that consumers account for nearly 70% of the U.S. gross domestic product (GDP). In light of the current economic situation, with a 7.6% unemployment rate that is more than double the norm, consumer spending and GDP seem destined to fall further.

As of this week, the retail outlook seems dim. The Labor Department recently reported that retailers slashed about 45,000 jobs last month to cut costs. Even major retailers such as Wal-Mart, Target and Macy’s have announced job cuts in the last few weeks. Amid this maelstrom of dismal news, however, retail sales unexpectedly rose 1% in January — the first time in the last six months that retail sales haven’t fallen from the previous month.

Your first instinct from this brief analysis might be to short retail stocks — possibly by using exchange-traded funds (ETFs). If you believe that the retail sector is going to be plagued unrelentingly by this ongoing recession, betting against retailers might be a profitable idea. As the retail industry enters a new year, consumers generally are curbing their spending, according to reports from the International Council of Shopping Centers and Goldman Sachs. Chain-store sales were flat for the week ended Feb. 7, compared to the previous week, but declined by 1.8% on a year-over-year basis.

Between job cuts and lagging sales, the shares of major retailers such as Wal-Mart, Target and Sears fell more than 6% last week. The S&P Retail Index, which tracks most retail stocks, last week fell 18 points, or 6.9%. As a result, ETFs that short this sector, such as UltraShort Consumer Goods ProShares (SZK) and UltraShort Consumer Services ProShares (SCC), have risen by more than 15% since January 2009.

On the other hand, if you believe that consumer spending will recover in a few months, you may prefer to invest in a retail rebound. Since the market usually rises before the economy, early bird investors willing to bet on retail stand to profit the most. Since retail stocks have been beaten down, the industry may bottom out in the coming months. Major retailers such as Macy’s and Sears have lost as much as 50% from their share prices in the last year. At some point, retail stocks inevitably will start to climb.

For those of you who believe that President Obama’s stimulus package will work and that tax cuts and bailouts might encourage people to resume their now-curtailed spending habits, you may want to invest in retail’s recovery. If that scenario plays out, expect to see the sector jump.

At this point, I am not recommending retail as an investment either way. We are at the proverbial fork in the road and it is not readily apparent which way to go. Although retail is starting off 2009 in rough shape, things could improve by year-end.

If you want specific recommendations about which ETFs to trade, check out my ETF Trader service by clicking here. As always, I am happy to answer any questions that you have about ETFs. To send me your questions, simply click here. I will try to follow up in a future ETF Talk.