What is the consumer staples sector?
It includes food, beverage and tobacco products, non-durable household goods and personal products, and food and drug retailers.
The Consumer Staples sector historically has outperformed during periods of economic slowdown and uncertainty, as investors are attracted by the perceived relative stability of the group. After all, consumers tend to buy food, soap and cleaning supplies regardless of economic conditions.
On the positive side, retailers within the sector have aggressively cut costs, leaving them in reasonable condition to deal with limited pricing power and less–than-exciting top line growth. COVID-19 related stocking of food and household goods has resulted in few negative earnings revisions, supporting the fundamental outlook. While our current view is for interest rates to remain low, which is a positive, the sector’s low sensitivity to the overall market would be a drag if the market continues to rally—leaving the macro factors at negative. Indeed, we’ve seen the sector trail the market since the low in March 2020. With this underperformance, the sector’s relative valuations have improved.
Overall, having a marketperform position to the Consumer Staples sector seems prudent to us. Keep in mind, however, that sharp volatility in the markets, earnings expectations and the economy, makes assessing valuations and fundamentals difficult.
Sector Overview: Consumer Staples
Note: Each of the sector lenses shown above—Macroeconomic, Value, Fundamental and Relative Strength—is both intuitive and evidenced-based in nature. Within each, there are a varying number of factors. The Macroeconomic lens includes sector sensitivities to interest rates, stocks and the value of the U.S. dollar; the outlook for each of these is determined by the Schwab Center for Financial Research (SCFR)’s Asset Allocation Working Group, which uses a mosaic approach of quantitative and qualitative considerations. Value includes six different valuation metrics that provide a holistic perspective on current valuations relative to each of the sectors’ own historical valuations, as well as relative to the other sectors. Fundamental provides insight as to how efficiently the companies within each sector use invested capital to produce earnings; this historically has been informative as to future relative performance of the sectors. Finally, Relative Strength measures momentum of the individual sectors against all of the other sectors. We also consider the data in the context of factors outside the scope of these indicators—for example, geopolitical risk or central bank policy changes.
Source: Charles Schwab, as of 06/09/2020
What do the ratings mean?
The sectors we analyze are from the widely recognized Global Industry Classification Standard (GICS®) groupings. After a review of risks and opportunities, we give each stock sector one of the following ratings:
- Outperform: likely to perform better than the broader stock market*
- Underperform: likely to perform worse than the broader stock market
- Marketperform: likely to track the broader stock market
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. Clients can log in to see our top-rated stocks in the Consumer Staples sector.
* As represented by the S&P 500 index
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