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Consumer Staples Sector Rating: Marketperform

By

Brad Sorensen

Brad Sorensen
CFA, Managing Director of Market & Sector Analysis, Schwab Center for Financial Research

Brad Sorensen heads market and sector analysis for the Schwab Center for Financial Research and writes for several Schwab publications. He is a member of Schwab's Investment Strategy Council.

Before joining Schwab in 2004, he was a senior analyst at AMG Guaranty Trust, where he designed portfolio strategies for high-net-worth individuals. Sorensen graduated from the University of Colorado with a bachelor's degree in finance and master's degrees in business administration and finance. He is a Chartered Financial Analyst charterholder.

February 22, 2018

Member for

9 months
Submitted by Eric Wilson on Thu, 02/22/2018 - 00:10
consumer-staples-shopping-cart_1187x528

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 geopolitical nervousness lately. On the other hand, improving global economic growth could dampen investor enthusiasm for the staples sector.

Market outlook for the consumer staples sector

Companies in the consumer staples sector generally deal with tight profit margins, but they have done a better job in our view of containing costs in recent years and the sector has attracted investor interest lately as it was the best performing group in November.

However, improving global economic growth could limit enthusiasm for the staples sector, whose traditionally steady earnings are often viewed as more attractive when economic growth is sluggish or declining. The economic outlook for the U.S. continues to be for decent growth forward looking indicators such as jobless claims continuing to look positive, remaining near historically low levels. Global growth has also improved, as PMI readings from various regions have risen in the last several months, according to Markit.

When market volatility picks up, as it has recently according to the VIX (a measure of volatility), the consumer staples sector is often viewed as a port in the storm. Temporary increases in domestic political and geopolitical tensions could 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 seems prudent 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 spike 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.
  • Stimulative fiscal policy: In addition to the tax reform package that passed, the current mix in Washington could implement further policies aimed at stimulating the economy, which could hurt the staples sector.

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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