Investors Doubt QE3 Lift to U.S. Discretionary Spending
Investors are proving skeptical that the Federal Reserve’s announcement of additional quantitative easing will get Americans to spend more.
The Consumer Discretionary Select Sector SPDR Fund -- which includes Amazon.com Inc. (AMZN) and Macy’s Inc. (M) --has lagged behind the Consumer Staples Select Sector SPDR Fund by 2.8 percent since Sept. 14, the day after the Fed unveiled plans to buy mortgage-backed securities at a pace of $40 billion a month until the labor market improves. During the preceding six weeks, the discretionary exchange-traded fund outpaced its defensive counterpart, which includes Procter & Gamble Co. (PG) and Coca-Cola Co. (KO), by 9.2 percent.
The relative performance between these funds since August suggests investors “bought the rumor and sold the news,” said Peter Cook, chief investment officer at Performance Trust Investment Advisors in Chicago. Still, “aggressive” monetary policy, such as QE3, probably will have a limited impact on consumer spending for nonessential goods and services, so the economy will continue to slow, he said.
U.S. gross domestic product expanded at a 1.3 percent annual rate in the second quarter, less than the previous estimate of 1.7 percent and below the first quarter’s 2 percent pace, data from the Commerce Department show.
The recent weakening in discretionary stocks relative to staples differs from 2010, when Fed Chairman Ben S. Bernanke’s speech at the annual Jackson Hole, Wyoming, conference in late August foreshadowed QE2, setting off almost six months of outperformance, said Jack Ablin, who helps oversee about $65 billion of assets as chief investment officer at BMO Private Bank in Chicago.
“Investors are skeptical that Fed policies are going to generate more retail sales,” he said.
The relationship between these ETFs is at a crucial level for those who want to bet that discretionary stocks will continue to lag behind staples, said Jim Stellakis, founder and director of research at New York-based research company Technical Alpha Inc. This “classic defensive trade” may have formed a so-called triple top after the QE3 news -- a bearish signal because discretionary stocks failed to hit a new high relative to staples on the Fed’s positive announcement, he said.
Now that a third wave of easing has become reality, continued lackluster job growth and the looming fiscal cliff may temper investor sentiment, according to Cook, who helps oversee more than $480 million in assets.
Employers added 87,400 jobs a month on average in April through August, compared with 211,400 in the preceding five-month period; and the jobless rate, at 8.1 percent in August, has been stuck above 8 percent since February 2009, Labor Department data show. Meanwhile, the U.S. faces higher taxes and reductions in spending on government programs that will take effect at year-end unless Congress acts.
If the economy slows further, the central bank could undertake additional action, making a “pro-growth strategy attractive, at least in the short-term again,” Cook said. Such a move could help push discretionary stocks to a new high relative to staples, “but in the longer term, recessionary forces would overwhelm the Fed’s actions,” he said.
Even so, the discretionary ETF is “relatively expensive” -- trading at a 50 percent premium to staples on a normalized price-to-sales basis -- and these stocks could weaken following their “phenomenal” outperformance since 2009, Ablin said.
For investors who doubt the long-term effect of QE3 on consumer spending, “now is a good entry level” to overweight staples, Stellakis said. The lack of follow through for discretionary stocks since the Fed’s announcement is a cautious signal of investor pessimism -- and “worth watching,” he said.
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