Daily Gains Letter

How to Profit from the Roller Coaster of Consumer Confidence

By for Daily Gains Letter |

consumer confidenceConsumers like to purchase stuff, whether they need it or not. In the United States, this tendency to buy is our economic engine, driving 70% of all U.S. economic growth. In 2012, $11.119 trillion of the $15.685 trillion produced in the U.S. went towards household purchases. (Source: Amadeo, K., “What Are the Components of GDP?” About.com, April 25, 2013.)

With that much at stake, it’s easy to see why consumer confidence levels are one of the best economic indicators we have. If consumers are optimistic, they’ll spend more, and the economy expands; if they’re pessimistic, they rein in their discretionary spending, and the economy grinds down.

While Wall Street may be riding high, most of Main Street isn’t, and you can see that reflected in the consumer confidence numbers. High unemployment, high debt levels, and the idea of higher interest rates and slower economic growth have put a damper on America’s desire to spend the country out of its recession.

U.S. consumer confidence levels fell in August, just one month after reporting a six-year high. According to the Thomson Reuters/University of Michigan’s preliminary reading, consumer sentiment slipped to 80.0 from 85.1 in July, the highest since July 2007. Wall Street economists, who clearly have their pulse on the heartbeat of the average American, were expecting August consumer confidence levels to actually increase to 85.5. (Source: “U.S. consumer sentiment weakens in August,” Reuters web site, August 16, 2013.)

It was a different story in the eurozone: consumer confidence levels there rose in August to their highest level in more than two years. During the second quarter, it was reported that the economies of the 17-member eurozone grew by 0.3%, pulling it out of a two-year recession. (Source: Price, M., “Eurozone comes out of recession,” BBC web site, August 14, 2013.)

Consumer confidence levels in Germany, Europe’s biggest economy, climbed again in August to seven percent, after hitting 6.8% in July. The country’s August consumer confidence levels have now surpassed pre-crisis levels. (Source: “German consumer confidence surpasses pre-crisis levels,” DW.de, July 30, 2013.)

Granted, one could argue that back in July, U.S. consumer confidence levels were robust, hitting a six-year high. And while Germany is riding high, its consumer confidence levels could perhaps retrace just as easily come September. That said, Germany’s unemployment rate is holding strong at a two-decade low, despite the eurozone unemployment rate hanging at record highs. The U.S. can’t quite make that claim. (Source: Riecher, S., “German Jobless Rate Holds Near Two-Decade Low in July,” Bloomberg web site, July 31, 2013.)

None of this, of course, means that Germany’s out of the woods, or that the U.S. is doomed. Both face economic headwinds—Germany just seems to be on better economic footing right now. And for many investors, it’s all about opportunities.

Those looking for exposure to growing economies can consider any number of U.S.-listed exchange-traded funds (ETFs) with exposure to Germany, including the iShares MSCI Germany Small-Cap (NYSEArca/EWGS) ETF, Market Vectors Germany Small-Cap ETF (NYSEArca/GERJ), or the SPDR S&P International Consumer Discretionary Sector (NYSEArca/IPD) ETF.

If investors want to march in step with U.S. consumers, they might want to keep an eye on shorting those firms that even Americans looking to stretch their dollar are forsaking. Wal-Mart Stores, Inc. (NYSE/WMT) and Target Corporation (NYSE/TGT) come to mind.

Consumer confidence levels ebb and flow with the moods of the everyday shopper. Whether it’s up or down, there are a number of excellent ways to play both consumer optimism and pessimism.

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