Consumer Staples Sector Rating: Marketperform
What is the consumer staples sector?
The consumer staples sector comprises businesses that tend to be less sensitive to economic cycles. It includes makers and distributors of food, beverage and tobacco products, non-durable household goods and personal products, and food and drug retailers.
Consumer staples sector overview
Consumer staples companies, typically viewed as a safe haven during periods of market volatility or economic downturn, may perform well if market uncertainty increases. Staples companies also have benefited in recent years from effective cost-cutting and lower energy input costs. On the other hand, improving global economic growth should dampen investor enthusiasm for the staples sector.
Market outlook for the consumer staples sector
Companies in the consumer staples sector generally deal with tight profit margins, but they have done a better job in our view of containing costs in recent years, while receiving some benefit from lower energy input costs.
However, improving economic growth should continue to dampen enthusiasm for the staples sector, whose traditionally steady earnings are often viewed as more attractive when economic growth is sluggish or declining. The economic outlook for the U.S. continues to be for decent growth and estimates for that growth rate have actually ticked slightly higher, according to Bloomberg. Global growth is also starting to show signs of improving, as PMI readings from various regions have risen in the last several months, according to Markit.
Recent market calm and improved optimism over the potential for economic growth also have the potential to weigh on the sector. During periods of overall market volatility, the consumer staples sector is often viewed as a port in the storm. Although some of the political uncertainty caused by the U.S. election has been resolved, there likely will be some market bumps going forward, which could support the sector. Additionally, given continued uncertainty over the pace at which the Federal Reserve will raise short-term interest rates, having a market-weight position in the staples sector seems prudent in order to provide some stability to an investment portfolio.
Factors that may affect the consumer staples sector
Positive factors include:
- Aggressive cost-cutting: Consumer staples retailers have aggressively cut costs and are attempting to create more perceived value for consumers, which could support sales.
- Lower energy prices: Consumer staples companies typically have tight margins, and a reduction in energy prices over the last two years should help lower the cost side of the equation, although that could be coming to an end as oil prices appear to have stabilized.
Negative factors for the consumer staples sector include:
- Increased competition: Competition continues to accelerate due to the growth of low-cost, emerging-market production. This could shrink pricing power in the sector by compressing margins and squeezing earnings.
- Accommodative monetary policy: Numerous central banks, with the notable exception of the Fed, are now firmly in easing mode in an effort to stimulate the economy, which could hurt the more defensive sectors.
- Stimulative fiscal policy: The new mix in Washington appears likely to implement policies that could stimulate the economy, at least initially, which could hurt the staples sector.
Clients can see our top-rated stocks in the consumer staples sector.
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