How to Invest Given Consumer Headwinds

NEW YORK ( Fabian Capital Management) -- Welcome to the summer of 2013.

Much of the U.S. is facing rising temperatures, rising oil prices, and rising interest rates, three trends that may ultimately cool the white-hot stock market and alter the landscape of consumer activity for the rest of the year.

Most of us are used to the seasonal spike in gas prices that typically comes around this time of the year. But the 12% rise in the price of the United States Oil Fund ( USO) over the past four weeks is certainly going to make life more difficult for travelers that are tightening their belts and preparing for summer vacations.

USO tracks the daily price movement of West Texas Intermediate light, sweet crude oil, which has been gaining steam since the middle of June.

This fund just recently hit new 2013 highs and does not appear to be running out of momentum any time soon. We may see oil prices continue to soar this summer as consumer demands ramps up during the peak driving season and supplies dwindle. This imbalance of supply and demand most likely will favor continued strength in the energy sector for the remainder of the summer months.

Another factor that will weigh heavily on consumers this summer is the recent spike in interest rates, which will undoubtedly temper mortgage and housing activity. Refinancing and mortgage applications have dropped significantly already as homeowners re-evaluate the affordability of their payments in the wake of higher interest rates. Many households may have to scale back their plans to refinance their homes or move into more expensive houses that would have been affordable when 30-year fixed mortgage rates were less than 3.5%.

Two areas of the market to watch this summer that could be affected by higher interest rates and slowing housing activity are the banking and real estate sectors. The SPDR S&P Bank ETF ( KBE) tracks 48 banks across the nation and currently contains $2.4 billion in assets under management.

Many of the underlying banks derive a portion of their revenue from mortgage activity, and their future profits could take a hit if the application downtrend continues. In addition, the iShares U.S. Real Estate ETF ( IYR) could also hit a stumbling block if higher interest rates slow the acquisition of new property and development by real estate investment trusts. At my Web site, I note five funds to buy for rising interest rates.

If we do see consumers start to tighten their belts, the resulting slowdown in discretionary spending could affect the Consumer Discretionary Select Sector SPDR ( XLY). This ETF has been one of the market leaders so far in 2013 as stocks in the retail, auto and entertainment industries have continued to march higher. Right now the trend is still in favor of discretionary stocks, but I am watching this sector closely for signs of weakness that may spill over into the rest of the market.

On the flip side, an area of the market that I think will continue to outperform this year is health care. The HealthCare Select Sector SPDR ( XLV) has been quite resilient and is clearly a recession-proof industry. With an aging population demographic and increasing health care costs, the earnings of these companies should continue to shine in the coming months.

Although I don't advocate buying XLV right here near its highs, I do believe that this ETF should have a spot on your watch list for a future purchase on a pullback in the market. As I write at my Web site, I am still anticipating additional summer volatility in stocks, which should set up for a strong finish to the year. In the meantime, I am continuing to evaluate both economic and technical data to establish entry points for cash on the sidelines.

At the time of publication the author had no position in any of the stocks mentioned.

This article was written by an independent contributor, separate from TheStreet's regular news coverage.

David Fabian is currently a Managing Partner at Fabian Capital Management, a fee-only registered investment advisory firm specializing in exchange-traded funds. He has years of experience constructing actively managed growth and income portfolios using ETFs. David regularly contributes his views on wealth management in his company blog, podcasts, and special reports. Visit www.FabianCM.com to learn more.

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