We use cookies to understand how you use our site and to improve your experience. This includes personalizing content and advertising. To learn more, click here. By continuing to use our site, you accept our use of cookies, revised Privacy Policy and Terms of Service.
You are being directed to ZacksTrade, a division of LBMZ Securities and licensed broker-dealer. ZacksTrade and Zacks.com are separate companies. The web link between the two companies is not a solicitation or offer to invest in a particular security or type of security. ZacksTrade does not endorse or adopt any particular investment strategy, any analyst opinion/rating/report or any approach to evaluating individual securities.
If you wish to go to ZacksTrade, click OK. If you do not, click Cancel.
Recent data by the Bureau of Labor Statistics showcased a favorable trend in inflation levels in the month of June. According to Yahoo Finance, the Consumer Price Index (CPI) surpassed economists’ expectations, falling 0.1% from the month of May, contrary to the forecasted rise of 0.1%.
However, with inflation still remaining above the Fed’s benchmark target of 2%, this marks the first negative monthly headline CPI since May 2020, along with the slowest annual price increase since March 2021. The favorable inflation data makes rate cuts in 2024 more likely.
According to the CME FedWatch Tool, the Fed may begin reducing interest rates from September, this year, with a 91.6% probability that they will decrease to 5-5.25%. The likelihood of a further fall in interest rates becomes more prominent toward December, with the rates potentially dropping to 4.75-5%, supported by a likelihood of 41.5%. Interest rates may witness a further drop, falling to 4.5-4.75%, with a 50% likelihood supporting this estimate.
Signs Pointing to the End of Inflation?
Per Yahoo Finance, inflation, which peaked at 9% two years ago, is now losing momentum. The current favorable trend in inflation supports this view, indicating a period of low inflation as it approaches the Fed’s benchmark level.
Goods prices are returning to normal, retailers are adjusting prices to match customer spending power, and the annual inflation in rents is moderating, trending down from its peak of 8.8%. These paint an optimistic picture of the end of high inflation levels.
As indicated by a steady decline in the Morning Consult “price surprise” index, quoted on Yahoo Finance, shoppers are experiencing fewer price changes in their regular purchases, correlating with declining inflation and improving consumer confidence.
An improved consumer confidence level is also highlighted by a better-than-anticipated sales report for the month of May. According to Yahoo Finance, retail sales rose 2.3% in June on a year-on-year basis, along with a 1.9% rise in online store sales last month.
The rising consumer confidence levels suggest optimism about future inflation trends. Economists now estimate that consumer spending, which accounts for over two-thirds of the economy, grew at a 2.0% annualized rate in the second quarter, setting a trajectory for higher growth.
ETFs to Consider
Declining inflation levels and surged market expectations of a September rate cut have increased the optimism surrounding the market. Favorable retail data and increased consumer spending point to a future of low inflation. This enhances the likelihood of inflation reaching the Fed's benchmark level, potentially ending its current persistence.
In such a scenario, investors can better position their portfolios to benefit from economic conditions by increasing exposure to the following areas.
Consumer Discretionary ETFs
Anticipations of the Fed cutting rates soon and favorable inflation data have heightened the appeal of the consumer discretionary sector. Lower rates will reduce borrowing costs, potentially boosting consumer spending within this sector.
Funds like Consumer Discretionary Select Sector SPDR Fund (XLY - Free Report) , Vanguard ConsumerDiscretionary ETF (VCR - Free Report) and Fidelity MSCI Consumer Discretionary Index ETF (FDIS - Free Report) are good options.
Growth ETFs
Growth funds typically excel during market uptrends, providing exposure to stocks with high growth potential. Growth investing prioritizes capital appreciation over annual income or dividends. With inflation on a downtrend and increased expectations of an interest rate cut in September, increasing exposure to growth ETFs is a smart strategy.
A reduction in interest rates will boost investor confidence, leading to higher retail spending. Rising online sales and heightened consumer spending expectations underscore a positive outlook for the retail sector, showcasing consumer resilience.
Companies in the technology sector rely on significant debt, making them sensitive to interest rates and inflation levels.When inflation cools and interest rates are lower or stable, these companies can borrow more cheaply to finance their expansion, increasing their profitability growth prospects.
The current rally in the sector driven by the AI frenzy, coupled with rate cuts, makes increasing exposure to tech ETFs a smart play. Investors can consider Vanguard Information Technology ETF (VGT - Free Report) , Technology Select Sector SPDR Fund (XLK - Free Report) and Invesco S&P 500 Equal Weight Technology ETF (RSPT - Free Report) to capitalize on the opportunity.
See More Zacks Research for These Tickers
Normally $25 each - click below to receive one report FREE:
Image: Bigstock
Closing the Chapter on Inflation? ETFs to Watch
Recent data by the Bureau of Labor Statistics showcased a favorable trend in inflation levels in the month of June. According to Yahoo Finance, the Consumer Price Index (CPI) surpassed economists’ expectations, falling 0.1% from the month of May, contrary to the forecasted rise of 0.1%.
However, with inflation still remaining above the Fed’s benchmark target of 2%, this marks the first negative monthly headline CPI since May 2020, along with the slowest annual price increase since March 2021. The favorable inflation data makes rate cuts in 2024 more likely.
According to the CME FedWatch Tool, the Fed may begin reducing interest rates from September, this year, with a 91.6% probability that they will decrease to 5-5.25%. The likelihood of a further fall in interest rates becomes more prominent toward December, with the rates potentially dropping to 4.75-5%, supported by a likelihood of 41.5%. Interest rates may witness a further drop, falling to 4.5-4.75%, with a 50% likelihood supporting this estimate.
Signs Pointing to the End of Inflation?
Per Yahoo Finance, inflation, which peaked at 9% two years ago, is now losing momentum. The current favorable trend in inflation supports this view, indicating a period of low inflation as it approaches the Fed’s benchmark level.
Goods prices are returning to normal, retailers are adjusting prices to match customer spending power, and the annual inflation in rents is moderating, trending down from its peak of 8.8%. These paint an optimistic picture of the end of high inflation levels.
As indicated by a steady decline in the Morning Consult “price surprise” index, quoted on Yahoo Finance, shoppers are experiencing fewer price changes in their regular purchases, correlating with declining inflation and improving consumer confidence.
An improved consumer confidence level is also highlighted by a better-than-anticipated sales report for the month of May. According to Yahoo Finance, retail sales rose 2.3% in June on a year-on-year basis, along with a 1.9% rise in online store sales last month.
The rising consumer confidence levels suggest optimism about future inflation trends. Economists now estimate that consumer spending, which accounts for over two-thirds of the economy, grew at a 2.0% annualized rate in the second quarter, setting a trajectory for higher growth.
ETFs to Consider
Declining inflation levels and surged market expectations of a September rate cut have increased the optimism surrounding the market. Favorable retail data and increased consumer spending point to a future of low inflation. This enhances the likelihood of inflation reaching the Fed's benchmark level, potentially ending its current persistence.
In such a scenario, investors can better position their portfolios to benefit from economic conditions by increasing exposure to the following areas.
Consumer Discretionary ETFs
Anticipations of the Fed cutting rates soon and favorable inflation data have heightened the appeal of the consumer discretionary sector. Lower rates will reduce borrowing costs, potentially boosting consumer spending within this sector.
Funds like Consumer Discretionary Select Sector SPDR Fund (XLY - Free Report) , Vanguard Consumer Discretionary ETF (VCR - Free Report) and Fidelity MSCI Consumer Discretionary Index ETF (FDIS - Free Report) are good options.
Growth ETFs
Growth funds typically excel during market uptrends, providing exposure to stocks with high growth potential. Growth investing prioritizes capital appreciation over annual income or dividends. With inflation on a downtrend and increased expectations of an interest rate cut in September, increasing exposure to growth ETFs is a smart strategy.
Invesco QQQ (QQQ - Free Report) , Vanguard Growth ETF (VUG - Free Report) and iShares Russell 1000 Growth ETF (IWF - Free Report) can be considered.
Retail ETFs
A reduction in interest rates will boost investor confidence, leading to higher retail spending. Rising online sales and heightened consumer spending expectations underscore a positive outlook for the retail sector, showcasing consumer resilience.
Investors can look into funds like SPDR S&P Retail ETF (XRT - Free Report) , VanEck Retail ETF (RTH - Free Report) and Amplify Online Retail ETF (IBUY - Free Report) .
Technology ETFs
Companies in the technology sector rely on significant debt, making them sensitive to interest rates and inflation levels.When inflation cools and interest rates are lower or stable, these companies can borrow more cheaply to finance their expansion, increasing their profitability growth prospects.
The current rally in the sector driven by the AI frenzy, coupled with rate cuts, makes increasing exposure to tech ETFs a smart play. Investors can consider Vanguard Information Technology ETF (VGT - Free Report) , Technology Select Sector SPDR Fund (XLK - Free Report) and Invesco S&P 500 Equal Weight Technology ETF (RSPT - Free Report) to capitalize on the opportunity.