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 laundry detergent regardless of economic conditions. However, the sector’s relative safety has prompted investors to push valuations to above-average levels, although the price-to-earnings ratio isn’t yet near past peaks.
On the positive side, retailers within the sector have aggressively cut costs and are attempting to create more perceived value for consumers, which could support sales going forward. Also, with competition fierce, we could see an increase in mergers and acquisitions, which would help to reduce capacity and potentially provide economies of scale.
On the other hand, competition has accelerated due to the growth of low-cost emerging-markets’ production. This could hurt pricing power in the sector by compressing margins and squeezing earnings. Also, while the sector could benefit in the near term from trade uncertainty, as investors seek perceived safer havens, if trade conflicts drag on and escalate, costs could rise for American producers and increase prices for consumers. This could dent already-slim margins in much of the space.
Overall, having a market-weight position in the Consumer Staples sector seems prudent to us, in order to provide some stability to an investment portfolio.
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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