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Consumer Staples Sector Rating: Marketperform

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

Recently the consumer staples sector has underperformed while the overall stock market has rebounded. 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. 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. However, in the U.S. the Citigroup Economic Surprise Index has bounced back into positive territory, indicating to us the slowdown in U.S. growth may not be as sharp as feared.

Also, when market volatility picks up, as it has recently, 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, although they have turned more dovish recently, having a market-weight 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.
  • Lower energy prices: The moderation in oil prices could result in less money being spent on energy costs and more available for other spending.

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 continue to escalate, costs could rise for American producers and increase prices for consumers.

Clients can see our top-rated stocks in the consumer staples sector.

Want to learn more about a specific sector?  Click on a link below for more information or visit Schwab Sector Views to see how they compare.

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Important Disclosures

Schwab Sector Views do not represent a personalized recommendation of a particular investment strategy to you. You should not buy or sell an investment without first considering whether it is appropriate for you and your portfolio. Additionally, you should review and consider any recent market news. Supporting documentation for any claims or statistical information is available upon request.

All expressions of opinion are subject to change without notice in reaction to shifting market conditions. Data contained herein from third-party providers is obtained from what are considered reliable sources. However, its accuracy, completeness or reliability cannot be guaranteed.

Diversification strategies do not ensure a profit and do not protect against losses in declining markets.

Indexes are unmanaged, do not incur management fees, costs and expenses, and cannot be invested in directly. Past performance is no guarantee of future results.

IHS Markit Manufacturing Purchasing Managers Index (PMI) is an indicator of the economic health of the manufacturing sector. The PMI index includes the major indicators of: new orders, inventory levels, production, supplier deliveries and the employment environment.

The S&P 500 Index is a market-capitalization-weighted index comprising 500 widely traded stocks chosen for market size, liquidity and industry group representation.

The Citi Economic Surprise Indices measure data surprises relative to market expectations. A positive reading means that the data releases have been stronger than expected and a negative reading means that the data releases have been worse than expected.

The Global Industry Classification Standard (GICS) was developed by and is the exclusive property of Morgan Stanley Capital International Inc. (MSCI) and Standard & Poor's. GICS is a service mark of MSCI and S&P and has been licensed for use by Charles Schwab & Co., Inc.

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