Consumer staples sector overview
Consumer staples companies, typically viewed as a safe haven during periods of market volatility or economic downturn, have benefited from the recent increase in volatility in the overall market. Staples companies also likely have benefited in recent years from effective cost-cutting and increased trade concerns lately. On the other hand, more dovish central bank policies, especially in the U.S., could dampen investor enthusiasm for the staples sector.
Market outlook for the consumer staples sector
To start the year, consumer staples sector has underperformed while the overall stock market has rebounded, although the past month’s performance has been better. Investors seemed to realize that the economic outlook for the U.S. continued to call for decent growth, with forward-looking indicators such as jobless claims continuing to look positive, although concern is rising about slowing growth, helping the group perform better recently. We will be watching global growth indicators closely in the coming months. There are some indicators showing a potential downshift in the growth rate, especially globally, as Markit PMI readings from areas such as Europe and China have declined, while in the U.S., the picture is mixed, with jobless claims remaining low, but the Index of Leading Indicators potentially rolling over.
Also, when market volatility picks up, the consumer staples sector is often viewed as a port in the storm—but once the market calms again, the consumer staples sector can struggle. Temporary increases in domestic political and geopolitical tensions could continue to help support the group for short periods going forward. Additionally, with the federal funds futures indicating the market believes the Federal Reserve will not raise short-term interest rates again this year, there is the risk that inflationary pressures could cause that opinion to change, and having a marketweight position in the staples sector seems prudent to us, in order to provide some stability to an investment portfolio. However, we are keeping our eye on a potential bump-up in the rating should concerns grow and the growth outlook deteriorate.
Factors that may affect the consumer staples sector
Positive factors include:
- Aggressive cost-cutting: Retailers have aggressively cut costs and are attempting to create more perceived value for consumers, which could support sales.
- Increase in merger and acquisition activity: With competition fierce, we could see an increase in M&A action, which would help to reduce capacity and potentially provide economies of scale.
- Increased geopolitical and domestic political anxiety: As geopolitical and domestic political tensions rise, investors typically become a bit more nervous, and may seek short-term shelter in the staples sector.
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.
- Trade disputes: If trade conflicts escalate, costs could rise for American producers and increase prices for consumers.
Clients can see our top-rated stocks in the consumer staples sector.
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