With the economy struggling from elevated prices and the Trump administration's tariffs, circumstances have not been particularly pleasant for consumers. It's no surprise, then, that the S&P Retail Select Industry Index has been a relative underperformer. Since the start of the year, the retail sector benchmark has gained less than 8% — a far cry from the nearly 17% return that the S&P 500 has delivered during the same frame.
Still, some evidence exists that point to the consumer sector making a comeback. In the trailing half-year period, the retail index gained more than 9%. Notably, in the past 30 days, the index swung up over 7%, beating out the S&P 500, which only managed a paltry return of 0.56% in the same window. Even more intriguing, the momentum boost doesn't appear to be solely based on technical noise.
Fundamentally, the latest economic data showed that the Federal Reserve's preferred inflation gauge eased slightly in September, implying some relief for households. Additionally, readings from early this month point to a rebound in consumer sentiment.
Specifically, core personal consumptions expenditure (PCE) — which is the inflation metric that the Fed tracks most closely — slowed from 2.9% to 2.8%, coming in just below expectations. Further, consumer spending increased by $65.1 billion or 0.3%, which was in line with the consensus forecast.
Helping to undergird these elements was preliminary December data from the University of Michigan, which showed that consumer sentiment edged up from 51.0 points in November to 53.3, marking a 4.5% gain. Moreover, the index covering consumer expectations moved up from 51.0 points to 55.0 points.
Still, not everything pointed in the positive direction, with overall consumer sentiment sitting 28% below the 74.0-point total achieved in December 2024. Veteran Wall Street analyst Ed Yardeni recently made the argument that a disconnect exists between consumer pessimism and the core datapoints of unemployment, inflation and wages. These latter three elements suggest healthier fundamentals than the sentiment readings imply.
However, there's emerging evidence that retailers are adapting to the current economic environment. For example, Dollar Tree Inc. (NASDAQ:DLTR) recently beat third-quarter estimates, with the company demonstrating strength across all income groups. Moreover, many retail-oriented enterprises are shifting business strategies, including adopting omnichannel and digital fronts, to maximize revenue generation.
The Direxion ETF: For those investors who are intrigued by the dynamic environment in retail, financial services provider Direxion offers an ultra-leveraged exchange-traded fund. Called the Direxion Daily Retail Bull 3X Shares (NYSE:RETL), the fund track tracks 300% of the performance of the S&P Retail Select Industry Index.
Primarily, the RETL ETF provides a convenient mechanism for speculation. Generally, those seeking leveraged positions must engage the options market, which may carry complexities not suitable for every trader. In contrast, Direxion ETFs function similarly to any other publicly traded security. As such, this familiarity helps mitigate the learning curve.
However, prospective participants should be cognizant of the risks involved. Mainly, ultra-leveraged funds are far more volatile than non-leveraged counterparts tracking standard indices like the S&P 500. Moreover, Direxion ETFs are designed for exposure lasting no longer than one day. Holding onto these vehicles for longer than recommended may expose traders to positional decay stemming from the daily compounding effect.
The RETL ETF: Since the start of the year, the RETL ETF has lost more than 3% of market value. In the last six months, though, the leveraged fund has moved up 17%.
- Thanks to a surge in sentiment that occurred in the back half of November, RETL finds itself above the 50- and 200-day moving averages.
- Accumulative volume increased in November and continues to be relatively robust in the current month, potentially indicating sustained sentiment.
- Critically, support has held at the $8 level. Moving forward, the next obvious target for the bulls is to secure the psychologically significant $10 line.
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