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 increased trade concerns lately. On the other hand, good global economic growth could dampen investor enthusiasm for the staples sector.
Market outlook for the consumer staples sector
The consumer staples sector has performed better recently, as ramped-up trade concerns and worries over the status of the global growth outlook appear to have helped the defensive sectors’ performance. However, the economic outlook for the U.S. continues to be for good growth, with forward-looking indicators such as jobless claims continuing to look positive, remaining near historically low levels. We will be watching global growth indicators closely in the coming months, but unless the U.S. outlook deteriorates it would be difficult for us to lift the rating of the staples sector to outperform in the near term.
However, when market volatility picks up, as it has again recently according to the VIX (a measure of volatility), 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, 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 continues to seem prudent to us in order to provide some stability to an investment portfolio.
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 volatility: With the recent increase in volatility, the traditionally stable consumer staples sector may become more attractive to investors.
- 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.
- Accommodative monetary policy: Numerous central banks, with the notable exception of the Fed, are firmly in easing mode in an effort to stimulate the economy, which could hurt more-defensive sectors, like consumer staples.
- Trade disputes: If trade conflicts escalate it could raise costs for American producers and prices for consumers.
- Rising oil prices: Higher oil and gas prices, especially during the summer driving season, could dampen the ability of lower-income consumers to spend, while also potentially raising the costs for staples companies.
Clients can see our top-rated stocks in the consumer staples sector.
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