U.S. Economy Shrinks in Q1: ETFs to Win/Lose

The American economy shrank an annualized 1.4% sequentially in Q1 of 2022, well below market forecasts of a 1.1% expansion and following a 6.9% expansion in Q4 of 2021, owing a record trade deficit and a fall in inventory investment. Rising Omicron infections to start the year weighed on activity across the board, while a 40-year high and the Russian invasion of Ukraine also contributed to the economic stasis.

An 8.5% decline in defense spending was a particular drag, chopping one-third of a percentage point off the final GDP reading. Consumer spending, which is the key part of the GDP scorecard, rose 2.7%, but that came amid a 7.8% increase in prices.  Fixed investment (7.3% vs 2.7%), particularly nonresidential, also contributed positively to GDP.

Goldman Sachs sees about a 35% chance of recession a year from now. In a forecast that is an outlier on Wall Street, Deutsche Bank sees the chance of a “significant recession” hitting the economy in late 2023 and early 2024, due to Fed policy tightening, as quoted on CNBC.

However, Ian Shepherdson, chief economist at Pantheon Macroeconomics said, “the economy is not falling into recession,” as quoted on CNBC. “Net trade has been hammered by a surge in imports, especially of consumer goods, as wholesalers and retailers have sought to rebuild inventory. This cannot persist much longer, and imports in due course will drop outright, and net trade will boost GDP growth in Q2 and/or Q3.”

Against this backdrop, below we highlight a few ETFs that could gain/lose in the light of the U.S. GDP report.

Consumer ETFs to Gain

One thing sure from the GDP scorecard is that consumer demand is strong. The personal savings rate—personal savings as a percentage of disposable personal income—was 6.6% in the first quarter, compared with 7.7% in the fourth quarter. It shows that consumers are shelling out more than the previous periods. The increase in personal consumption expenditure reflected increases.

Consumer companies are hiking prices; for example, Unilever hiked prices by more than 8% as cost pressures mount to offset higher supply chain and energy costs, more than outweighing a dip in sales volumes.

This ensures a rally in consumer stocks and ETFs in the coming days. Consumer Discretionary Select Sector SPDR ETF XLY and iShares Evolved U.S. Consumer Staples ETF IECS should be in a beneficial position.

Bank ETFs to Rule

Banks are in the sweetest spot on faster Fed policy tightening. Disposable personal income increased 4.8% in the first quarter compared with an increase of 0.4% in the fourth quarter. This rules out the fear of delinquencies or default on loans in the banking sector. In any case, banking is not an overvalued sector currently. Earnings have been decent in the sector. A prospective rising rate environment is another plus for the banking stocks. SPDR S&P Bank ETF KBE is thus a good bet.

Inflation-Beating ETFs to Gain

The PCE price index increased 7.0% in Q1 compared with an increase of 6.4% in Q4. Excluding food and energy prices, the PCE price index increased 5.2% in Q1 compared with an increase of 5.0% in Q4. The reported figures are much higher than the Fed’s target of 2%.

No wonder inflation-beating ETFs like Amplify Inflation Fighter ETF IWIN, JPMorgan Inflation Managed Bond ETF JCPI and AXS Astoria Inflation Sensitive ETF PPI are sure to win ahead.

Defense ETFs to Lose?

As the CNBC article reported that an 8.5% decline in defense spending was a headwind to the wellbeing of the U.S. GDP reading. This could prove to be a little drag on defensive ETFs like iShares U.S. Aerospace & Defense ETF ITA and Invesco Aerospace & Defense ETF PPA.


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SPDR S&P Bank ETF (KBE): ETF Research Reports
 
Consumer Discretionary Select Sector SPDR ETF (XLY): ETF Research Reports
 
iShares U.S. Aerospace & Defense ETF (ITA): ETF Research Reports
 
Invesco Aerospace & Defense ETF (PPA): ETF Research Reports
 
iShares Evolved U.S. Consumer Staples ETF (IECS): ETF Research Reports
 
AXS Astoria Inflation Sensitive ETF (PPI): ETF Research Reports
 
Amplify Inflation Fighter ETF (IWIN): ETF Research Reports
 
JPMorgan Inflation Managed Bond ETF (JCPI): ETF Research Reports
 
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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