PSL - Stocking Up On Consumer Staples
2023-08-24 03:00:00 ET
Summary
- It might be time for investors to focus less on what consumers want and more on what they need.
- Consumer discretionary stocks have trounced consumer staples thus far in 2023. In our view, that tide looks ready to turn.
- Overweighting consumer discretionary stocks was a smart adjustment at the start of 2023.
By Jacob Gamerman, CFA
It might be time for investors to focus less on what consumers want and more on what they need.
Consumer discretionary stocks have trounced consumer staples thus far in 2023. In our view, that tide looks ready to turn.
The consumer discretionary sector includes “nice-to-have” trappings, such as luxury items, entertainment and travel, while consumer staples include goods that buyers can’t live without, like food, household and personal products.
Discretionary stocks tend to move in step with overall economic conditions; staples tend to offer a welcome cushion in a downturn.
Overweighting consumer discretionary stocks was a smart adjustment at the start of 2023. Through mid-August, the discretionary sector advanced roughly 30% - about twice the rise of the S&P 500 - thanks to an accumulation of excess savings; meanwhile, the staples sector shed 1%, underperforming a market which rose on easing fears of a severe recession. 1
While selective consumer discretionary stocks may still have room to run, we believe the staples sector has the potential to deliver higher returns over the next 12 months.
First, it appears to us that the growth in household discretionary cash flow - what’s left after outlays for food, healthcare, energy and savings - is poised to decelerate.
Second, with excess savings now nearly spent, credit card balances are again on the rise, along with delinquencies. 2 Total consumer credit now exceeds the 2012-2019 trend line, suggesting perhaps that more consumers are borrowing out of necessity than discretion.
Third, we find the consumer staples sector tends to bounce back after inflationary bouts like the one we’ve experienced recently. Since 1970, the total CPI has exceeded 5% on four other occasions; when prices eventually dipped below that threshold, consumer staples stocks outperformed the broader market three out of four times. 3
While staples stocks have taken a beating, we think the sector’s top-line prospects in the Beverage and Household and Personal Care categories are better than expected.
All in, our analysis suggests that investors could benefit from paring their exposure to companies that make what consumers want and shifting more weight toward companies that make what we all need.
Sources: 1) Fidelity , data as of August 16, 2023; 2) NB Macro Research as of July 21, 2023; 3) FactSet, NB.
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Stocking Up On Consumer Staples