The holiday season is a great time to clean up your portfolio — but first, determine which way the winter winds are blowing by checking on the economy's health.
For an accurate picture of U.S. economic activity, Mish Schneider, chief strategist at MarketGauge.com, takes a look at the flow of goods and services from producer to consumer. "Transportation, small caps and retail are the three most important inside sectors of the economy," Schneider told Investor's Business Daily. To determine how each sector is doing, she focuses on ETFs tied to each of these three sectors.
Three Economic Activity Gauges To Watch
To start, Schneider says to look at how small-cap companies are doing through the Russell 2000, tracked by the iShares Russell 2000 ETF. The Russell 2000 index focuses on small, public U.S. companies and filters out larger companies like Apple or Microsoft that might see better protections — or more shocks — from overseas events that would distort a look at the U.S. economy. "The small caps, the Russell 2000, we're using as a barometer, sort of the grandfather of the U.S. economy," Schneider says.
The next indicator is how transportation in the U.S. is doing. Schneider uses the iShares U.S. Transportation ETF, which tracks exposure to companies involved in rail transportation, airfreight and logistics and cargo ground transportation, among other indicators.
It's similar in spirit to the "cardboard box index," which tracks the price of cardboard to approximate economic activity. Rising prices means higher demand for packaging. Behind it all are people buying, selling and shipping goods.
Granny Retail's Roaring Rampage
The third gauge of U.S. economic activity is to determine how much consumers are buying and spending by tracking retail shops and stores. "I call it 'granny' retail after my own grandma who walked with a cane," said Schneider. "When she went into a shop to spend money, all of a sudden she'd lose her cane and have a great time shopping."
"It represents to me in that story the consumer," she says.
Schneider turns to the SPDR S&P Retail ETF, which follows sub-industries like apparel and automotive retail, computer and electronic retail, department stores, drug retailers and food retailers.
Economic Activity Shows Signs Of Cooling
Schneider warns the gauges may be blowing cold. Is the U.S.'s hot stock streak coming to an end?
The key U.S. growth area of industrial manufacturing is losing steam. The Russell 2000 index has recently been on a losing streak since reaching short-term highs in late July. Conflicts like the Israel-Hamas war and Russia-Ukraine war are contributing to cooling investor appetites. Trading volumes in the past few weeks have exceeded the 50-day moving average, indicating selling among institutional investors. A bounce is in progress, but whether or not it sticks is yet to be seen.
That effect is also noticeable in transportation, says Schneider. "The supply of goods has basically almost come to a screeching halt. Not quite Covid halt, but still slowing." In addition, retailers are also beginning to falter as consumers feel the pinch from inflation and high rates. Even safe-haven bets like semiconductors, with ties to both the Russell 2000 small caps and to transportation, is stagnating.
Retail Stocks To Watch
But retail might be called on again to save the holidays. Consumers flush with pandemic-era savings helped prop up economic activity in the past, so maybe they can do it again.
"If the consumer can hang in there — if 'Granny Retail' can continue to drop her cane and shop essentially and overlook all of the pressures of the market, then that would probably be one of y favorite places to be looking at right now," Schneider says.
Retail stocks to watch with high IBD ratings include O'Reilly Automotive, Ollie's Bargain Outlet and Urban Outfitters.
Follow Mike Juang on X, formerly Twitter, at @mikejuangnews.
