The economy appears to be picking up steam. The Atlanta Fed GDP Now forecast for 1Q17 GDP is 3.4%.
Let's assume the Atlanta Fed is right. Economic growth is picking up from 1.9% growth in 4Q16 to 3.4% 1Q17.
Cyclically oriented sectors of the economy may see increasing growth. All but one of cyclical sectors have all outperformed the S&P 500 Index over the past year. The consumer discretionary sector is the only laggard.
The underperformance of the consumer discretionary sector can be seen more clearly in the next chart.
What is the cause of this underperformance and is it likely to reverse? The consumer discretionary sector includes some industries undergoing significant secular shifts. For example, the retail industry has been dealing with a huge shift to online shopping at the expense of brick & mortar stores. The restaurant industry is also dealing with a drop in traffic, similar to traditional retail. The media industry has been shifting to over-the-top content delivery rather than the traditional cable bundle. Although there will be winners and losers as a result of these shifts, I don't see them as negative for the sector overall. Consumer discretionary spending should continue to have a moderately positive outlook based on growing discretionary income and a labor market near full employment. I recommend buying $XLY or $VCR to overweight the sector. Amazon, $AMZN, has the largest market capitalization in the sector, and the allocation to $AMZN is 12.8% and 10.2% for $XLY and $VCR respectively. I prefer $VCR because the concentration of the top 10 holdings is 42% as opposed to 53% for $XLY.
Michael Grove, CFA