In a bid to grow sales volume and market share—and responding to input costs that eased in the past year—some companies slowed their price increases in 2023 and offered more discounts. But this led to decelerating revenue growth in the sector in 2023, which weighed on the stocks even as companies delivered better-than-feared earnings. Higher interest rates also lured many investors toward fixed income and away from dividend-paying stocks. The consumer discretionary sector of the economy encompasses various industries, the companies of which produce consumer discretionary products. Individuals can focus their investing on this sector by buying consumer discretionary stocks, mutual funds, and ETFs. Examples of defensive stocks include any essential items from defensive sectors like groceries, personal hygiene products, water, electricity, heating, and pharmaceuticals.
- Fundamentals like food, healthcare, and utilities are just a few of the many types of industries a defensive sector fund might invest in.
- Names like Philip Morris, we think, right now is a pretty attractive name; Coke is another name that we think is also particularly attractive in this environment.
- Ben Shuleva, manager of the Fidelity® Select Consumer Staples Portfolio () says that historically, the sector has outperformed the broad market during recessions.
- Some categories in the sector are more conducive to moats than others, but Morningstar’s Matt Coffina, R.J. Hottovy, and Erin Lash say opportunities exist among beverage and tobacco firms.
- Without Tesla, cyclical sectors such as Commercial Services, Technology Services, and Consumer Durables are all trading below their trailing 12-month average price-to-earnings ratio.
While it’s never possible to perfectly predict what will shine when, there are often patterns that can give investors clues. In the current environment—with corporate earnings strength eroding, and worries growing over the market and economy—investors might want to take a closer look at stocks in defensive sectors. Although the economic outlook remains uncertain, consumers are likely to continue to need the everyday products—from toothpaste to toilet paper— that staples companies produce and sell. When exactly sales volumes pick up may depend on the health of the consumer and economy. However, valuations in the sector remain compelling, especially given the potential for improving profit margins.
Discount/dollar stores tend to target lower-income customers, with 30% of customer households earning under $25,000 a year (for Dollar General specifically, but which we believe is a proxy for the space; Exhibit 4). These customers often must minimize absolute dollar costs, leading to repeat visits for smaller packaged necessities that can carry higher retailer margins, but would be costly to ship if ordered online. This means that they’ll most likely save less and instead make major purchases in the following 12 months.
It has $109.74 million in assets, while its net expense ratio is 1.72%. Consumer spending accounts for about 70% of U.S. economic activity, so economists pay close attention to consumer behavior as they take measure of the broader economy. For example, they may postpone vacations and delay the purchase of products that aren’t essential for daily living. These products might include high-end clothing, big-screen televisions, and expensive new cars. FactSet does not endorse or recommend any investments and assumes no liability for any consequence relating directly or indirectly to any action or inaction taken based on the information contained in this article.
Widespread Promotional Activities Pervade CPG Space
Names like Philip Morris, we think, right now is a pretty attractive name; Coke is another name that we think is also particularly attractive in this environment. Both are very strong players within fairly consolidated industries, dominant market share positions, and still some emerging-market growth potential, as well. Both pay pretty strong dividends, certainly above 2%, and so you get that part of the story as well. PBJ tracks the investment results of the Dynamic Food & Beverage IntellidexSM Index, which includes U.S. food and beverage companies. The fund normally invests at least 90% of its assets in the securities included in the underlying index. It has $86.30 million in assets, while its net expense ratio is 0.63%.
In a recession, consumers tighten their belts, but they’re not likely to stop paying their electric bill, buying groceries, or skipping their prescriptions unless dire circumstances require it. The consumer discretionary sector consists of a variety of industries that can be sensitive to changing economic conditions and bellwethers of consumer spending. The companies included in these industries react and adjust to changes in consumer discretionary income and purchases of non-essential products and services. By contrast, if you spread your money among funds in the healthcare, consumer staples, utilities, and telecommunications sectors, you can enjoy greater diversification. In turn, you would reduce—but not eliminate—the amount of loss you might experience in your portfolio if one defensive industry were to decline. That is because not all of these industries will go up or down in price under the same types of economic conditions.
Find stocks
This information is not intended as a recommendation to invest in any particular asset class or strategy or as a promise of future performance. There is no guarantee that any investment strategy will work under all market conditions or is suitable for all investors. Each investor msci world index etf should evaluate their ability to invest long term, especially during periods of downturn in the market. Investors should not substitute these materials for professional services, and should seek advice from an independent advisor before acting on any information presented.
The return on defensive stocks is usually slow and steady, as are dividends if the company pays them, which can make it easier to predict how your investments will grow over time. That might be appealing if you’re working toward a specific financial goal or planning for retirement. CPG manufacturers https://bigbostrade.com/ are also keen to appeal to a value-conscious consumer. While promotions weren’t used when supply and demand were off-kilter, promotional intensity has more recently stepped up. Total CPG promotional levels jumped 10% on average over the last 10 weeks versus the same period a year ago.
Healthcare
Renewable energy sources like solar panels and wind turbines are also included. Even in a recession, consumer spending on utilities is less likely to drop, so the value of stocks in this sector remain relatively stable. In a stock market downturn, owning defensive stocks may have advantages, but trading them can backfire.
These companies generate steady cash flow and predictable earnings during strong and weak economies. Their stocks tend to outperform nondefensive or consumer cyclical stocks that sell discretionary products during weak economies while underperforming them in strong economies. When the overall economy isn’t doing well, one sector that usually performs better than average is Consumer Staples or Consumer Defensive.
He’s been looking for companies that may hold up best, within the sector, under the combined pressures of a softening economy and rising input prices. It makes intuitive sense that companies in the consumer staples sector—which can encompass everything from bread to bacon, and toilet paper to toothpaste—generally hold up well in a rocky economy. We all still need to brush our teeth and eat breakfast in the morning, no matter what the market is doing. Yoon says that portfolio holding Danaher () has exemplified this thesis. The conglomerate has a number of life sciences subsidiaries, including companies that develop and sell tech for developing cell lines, and companies that develop and sell nucleic acid.
What is defensive vs cyclical stocks?
Ben Shuleva, manager of the Fidelity® Select Consumer Staples Portfolio () says that historically, the sector has outperformed the broad market during recessions. But he also cautions that this time might be different (with the caveat that Fidelity experts do not believe the economy is currently in recession). “Inflation is bad for everyone, and it’s bad for consumer staples,” he says. The sector underperformed the broad market during the inflationary downturns of the 1970s (though subsequently outperformed), so he is circumspect about pounding the table. Similar to utilities, at least some of the health care sector’s outperformance this year can be attributed to valuations, says Yoon. “The sector’s valuation, relative to its long-term average, came into the year very attractive,” he says.
As the name implies, they can act as a kind of protective shield that helps investors endure market downturns. This sector includes companies that offer communication services through cellular, fiber-optic, fixed-line, wireless, and high-bandwidth networks. Their businesses follow known patterns through each phase of the economic cycle and thus tend to preserve value as the economy moves into a recession. Fidelity Select Communication Services Portfolio (FBMPX) is one such mutual fund that grants investors exposure to this sector. On the downside, the low volatility of defensive stocks often leads to smaller gains during bull markets and a cycle of mistiming the market.
Recent Comments