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Uptick in Consumer Spending Could Mean a Second-Half Market Rally

Stocks in this article: XLY XLP DIS AMZN HD MCD F SBUX PG KO PM WMT CVS SPY URBN ANF AEO

NEW YORK (TheStreet) -- The exchange-traded fund representing companies sensitive to economic cycles is doing far better than the ETF of companies selling food and other necessities consumers need. That could mean better times in this back half of the year for the economy and the stock market as consumer sentiment improves.

The Consumer Discretionary Select Sector SPDR (XLY) includes Walt Disney Co (DIS), Amazon (AMZN), Home Depot (HD), McDonald's (MCD), Ford Motor (F) and Starbucks (SBUX). It is currently trading around $67, down a fraction for the year to date.

Read More: Kinder Morgan May Target Oil, Gas and Coal After $71 Billion Deal

By contrast, the Consumer Staples Select Sector SPDR (XLP) includes Procter & Gamble (PG), Coca-Cola (KO), Philip Morris International (PM), Wal-Mart Stores  (WMT), and CVS Caremark (CVS). that ETF trades at $44, up 2.8% for the year to date.

Until recently, spending was tight. But consider the chart below.

XLY Chart
XLY data by YCharts

Looking at the relative strength of a basket of consumer discretionary stocks over a basket of consumer staples stocks is an important determinant of consumer behavior as discretionary spending predicts future economic growth.

Consumer spending accounts for up to 70% of economic activity, so essentially the more they spend the faster the U.S. economy grows. Similarly, discretionary spending is more elastic than spending in the consumer staples space. For example, a person may not need a new rake from Home Depot if money is tight, but will always need to get their medications at the local CVS.

Read More: MannKind Lands Afrezza Partner but at High Cost

Earlier this year, discretionary stocks took a massive nose-dive compared to consumer staples. Weak employment growth and severe winter weather in the first quarter deterred people from shopping and led investors to sell discretionary names across the board.

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