How will consumption shape investments after the payrolls report?

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Part 10
How will consumption shape investments after the payrolls report? PART 10 OF 12

Why consumer confidence impacts your debt and equity investments

Consumer confidence releases

As we mentioned in the previous part of this series, the Bloomberg Consumer Comfort Index (or Bloomberg CCI) is due to release on Thursday, April 10, and the Thompson Reuters/University of Michigan Surveys of Consumers is due to release on Friday, April 11. This article discusses the importance of the reports for investors.

Why consumer confidence impacts your debt and equity investments

Consumption expenditure is the largest component in the country’s gross domestic product (or GDP), accounting for over two-thirds of the economy. Other factors remaining constant, an increase in the consumer confidence indices would imply that consumption expenditure would get a boost and GDP would grow. Consumers who are optimistic about their economic environment are more likely to make purchases and incur debt on capital purchases than pessimistic consumers. The multiplier effect from an increase in consumption expenditure would also benefit the whole economy.

Interest rates usually rise during an expansion, which would mean a fall in bond prices. Investors can benefit from rising rates by investing in floating-rate ETFs like the iShares Floating Rate Bond (FLOT) and the VanEck Vectors Investment Grade Floating Rate ETF (FLTR). As interest rates rise, these ETFs benefit from rising rates, as their interest rates aren’t fixed but benchmarked to a reference rate and reset at periodic intervals.

The correlation between the monthly Bloomberg CCI and the Dow Jones Industrial Average (DVY), between January 1987 and February 2014, was estimated at 0.77. The iShares Select Dividend ETF (DVY) tracks the Dow Jones US Select Dividend Index, which screens stocks based on growth rates in dividends per share, dividend payout ratios, as well as average daily trading volume in dollar terms. Stocks are included in the index based on dividend yield. Some S&P 100 Index (OEF) components, like the consumer packaged goods company Proctor & Gamble (PG) and energy company ConocoPhilips (COP), offer some of the highest dividend yields (in excess of 3%) among large-cap stocks. Both Proctor & Gamble (PG) and ConocoPhilips (COP) should get a boost if consumption increases.

To read about an indicator that will have important implications for inflation, continue to Part 11 of this series.


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