Will Wal-Mart Drag Down Consumer ETFs?

Retail giant Wal-Mart (NYSE:WMT) is off to its worst start in seven years and American consumers are spending less money. The pinch of higher payroll taxes, which began on Jan.1, 2013 is already translating into less spending.

Here's what Jerry Murray, Wal-Mart's vice president of finance and logistics wrote in an internal email obtained by news reporters:

"In case you haven't seen a sales report these days, February month-to-date (MTD) sales are a total disaster. The worst start to a month I have seen in my ~7 years with the company."

Wal-Mart along with 42 other stocks including Procter & Gamble, Coca-Cola, and Costco, is part of the Consumer Staples SPDR ETF (NYSEARCA:XLP).  

Among the 386 companies within the S&P 500 that reported Q4 2012 earnings, 81% of consumer staples have beaten earnings estimates, according to FactSet Research. However, based upon current earnings estimates, Q1 2013 earnings for the entire S&P 500 are down -0.04%. Consumer discretionary (NYSEARCA:XLY) and consumer staples (NYSEARCA:XLP) are the two ETFs that carve out consumer focused stocks within the S&P 500 (NYSEARCA:SPY). Combined together, both XLP and XLY account for 22.26% of the S&P 500's equity exposure.

As we wrote to readers in the March 2013 edition of the ETF Profit Strategy Newsletter, the American Tax Payer Relief Act of 2012 has nothing to do with genuine tax reform or relief. Unlike before, Americans now pay 2% in Social Security taxes on their first $113,700 in income. For a person making $40,000 per year, this means$780 of lost wages. Furthermore, taxes were increased to a top rate of 39.6% for individuals earning $400,000 a year and $450,000 for couples. "This will inevitably translate into less consumption and less discretionary spending."

For a family earning $50,000 the tax bite is equal to a basket of groceries every single month, according to Wal-Mart's analysis. XLY and XLP have both gained just over 7% in value since the beginning of the year. Meanwhile, rising gasoline prices are another negative trend. The average price for a gallon of regular gas nationwide has rise from $3.30 in January, to $3.52 today, according to AAA. ETFs like the ProShares UltraShort Consumer Goods ETF (NYSEARCA:SZK) are designed to increased 200% daily, when consumer stocks decline.