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Consumer Staples Sector Rating: Marketperform

By

Brad Sorensen

photo
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.

August 30, 2018
Submitted by satya.billa on August 30, 2018
Consumer Staples Sector

Consumer staples sector overview

Consumer staples companies, typically viewed as a safe haven during periods of market volatility or economic downturn, could benefit from an increase in investor uncertainty. 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

Following a historically typical pattern, the consumer staples sector has outperformed during trade-induced volatility, as investors looked for the perceived relative stability of the group, but has underperformed at times when those concerns have eased. This type of action seems likely to continue over the coming months as investors weigh the need for more perceived stability in their equity portfolios. However, 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 the U.S., Europe and China have declined.

Also, when market volatility picks up, 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, with the federal funds futures indicating the market believes the Federal Reserve will cut rates further this year—following the most recent cut, there is a risk that market participants are in for a disappointment if rates stay more elevated than currently forecast. Having a marketweight 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 further.

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.

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:  While the sector could benefit in the near term from some trade uncertainty as investors seek perceived safer havens, if trade conflicts drag on and at the same time escalate, costs could rise for American producers and increase prices for consumers, which could dent already slim margins in much of the space.

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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