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Retail Sales Fall: An Early Sign of an Economic Slowdown?

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Third-quarter earnings are off to a good start, but weaker-than-expected retail sales data stymied the market momentum. U.S. retails sales fell for the first time since February, which could be an indicator that a manufacturing sector slowdown could be affecting the consumer end of the equation.

The Commerce Department said retail sales dropped 0.3% last month, which was marked by less spending on building materials, online purchases and automobiles. August data was revised higher to reflect retail sales gaining 0.6% as opposed to the initial 0.4% reading.

Nonetheless, the September data contrasts a Reuters poll of economists who were forecasting that retail sales would increase 0.3%. Compared to the September data from last year, however, retail sales increased by 4.1%.

Overall, the data could be an indication that a slowdown could be in its early stages.

“While this is by no means conclusive evidence that the consumer is wavering (after all, the upward revisions reduce the impact of September’s declines), it nonetheless reinforces our ongoing concern that a spending retrenchment will ultimately trigger a more durable slowdown,” wrote Ian Lyngen, head of rates research at BMO Capital Markets.

According to a Wall Street Journal report, the nature of “retail sales can be volatile from month to month, and the broader trend this year has shown steady growth. They rose in August by a revised 0.6%, more than previously estimated. Sales increased 1.5% in the July-through-September period compared with the previous three months.”

“Given that the U.S. consumer is 68% of the economy, it’s important that the consumer holds up and continues to spend,” said Quincy Krosby, chief market strategist at Prudential Financial. “But we also heard from the banks that consumers are spending. We’re seeing it in credit cards and loans growth.”

“The question is whether that is going to erode,” Krosby added.

Will this latest data affect relative value exchange-traded funds that address defensive and cyclical equities?

For investors looking for continued upside in U.S. cyclical sectors over defensive sectors, the Direxion MSCI Cyclicals Over Defensives ETF (NYSEArca: RWCD) offers them the ability to benefit not only from cyclical sectors potentially performing well, but from their outperformance compared to defensive sectors.

Conversely, if investors believe that U.S. defensive sectors will outperform cyclical sectors, the Direxion MSCI Defensives Over Cyclicals ETF (NYSEArca: RWDC) provides a means to not only see defensive sectors perform well, but a way to capitalize on their outperformance compared to cyclical sectors.

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