While we view this shift as a temporary byproduct of the economic backdrop, we see continued opportunities for growing online penetration. We see opportunities in consumer packaged goods, where nearly 60% of our coverage trades in 4- or 5-star territory. “Defensive” stocks can be found in many industries if the firm has strong earnings, innovation, pricing power, and a track record of disrupting the status quo. You can also learn more about sector investing and read more recent market insights and commentary from Fidelity’s portfolio managers. Shuleva says he’s found the strongest opportunities among beverage companies, including the main soda companies.

  1. Investor sentiment also shifted against this segment due to worries about how new weight-loss drugs might impact demand.
  2. On the downside, the low volatility of defensive stocks often leads to smaller gains during bull markets and a cycle of mistiming the market.
  3. As we consider the market environment in 2021, we have a new administration in the White House, ramped-up COVID-19 vaccine distribution, additional fiscal stimulus, and pent-up demand for travel and leisure.
  4. During an economic decline, consumers still need staples, such as cereal and milk, and they may even increase their use of so-called “sin stock” products, such as cigarettes and alcohol.

When other stocks are soaring, defensive stocks are more likely to perform below the market. Defensive stocks tend to perform better than the broader market during recessions. However, during an expansion phase, they tend to perform below the market.

Invesco S&P SmallCap Consumer Stapl ETF (PSCC, 59%)

Additionally, we see that almost all defensive sectors are trading above their historical P/E ratios despite having had a rough year in 2020. We could also look at the three- or five-year averages to get a longer-term valuation picture. While no stock is completely immune to market volatility, consumer staples stocks tend to decline much less during corrections. At this time of writing, the broad-based S&P 500 index has slipped nearly 7% in the year to date, but the S&P 500 consumer staples sector is only down 4% for the same period.

A value stock traditionally has a lower price when compared to stock prices of companies in the same industry. This indicates that the company may be undervalued, as investors are not expressing as much interest in such companies. The most commonly used way to check tokenexus for value is with the price-to-earnings multiple, or P/E. A low P/E multiple is a good indication that the stock is undervalued. We aren’t blind to consumers’ search for value amidst strained financial resources, and the near-term impact this is having on retailers.

Companies in the consumer staples sector are often less sensitive to big economic fluctuations because people are unlikely, unwilling, or unable to cut these items out of their budgets, regardless of their financial situation. Companies that manufacture or distribute food, beverages, tobacco products, personal and hygiene products, and non-durable household goods make up the consumer staples sector. Unlike stocks in the consumer discretionary sector, which includes companies like car manufacturers and hotels, stocks in consumer staples tend to hold steady when people reduce their spending during a recession. These companies produce goods or offer services that consumers will buy regardless of the state of the market or economy. Fundamentals like food, healthcare, and utilities are just a few of the many types of industries a defensive sector fund might invest in.

In other words, rather than having to buy these products because they are necessities, they have the freedom to decide—the discretion—to purchase them, or not. Consumer discretionary purchasing usually increases when consumers have more money to spend. Industry performance is a useful gauge of trends in consumer spending. Consumer discretionary industries tend to thrive when people feel confident about income and spending is strong.

Consumer staples sector

The consumer staples sector encompasses makers of everyday items like packaged food, toothpaste, and dish detergent. It’s considered to be a “defensive” sector because consumers tend to still buy such products even when times are tight, and because it includes many mature dividend-paying companies. The term “consumer discretionary” refers to non-essential products and services that consumers tend to purchase when the economy is strong, consumer confidence is positive, and individuals have discretionary income to spend. Utilities, consumer staples, and healthcare represent the main defensive sectors.

S&P Futures

During contractions, personal income and personal spending are usually lower and spending on consumer discretionary products decreases. The reduced demand for consumer discretionary products is usually a precursor of lower sales for the companies that produce these products. Lower sales can lead to worsening economic conditions and greater economic contraction.

The utilities industries can be significantly affected by government regulation, financing difficulties, supply and demand of services or fuel, and natural resource conservation. Because of their narrow focus, sector funds tend to be more volatile than funds that diversify across many sectors and companies. Within the sector, he says that outperformance has been driven by the most defensive types of companies, including large-cap pharmaceutical companies, large-cap pharmaceutical distributors, and large-cap managed care companies.

Inflation has pressured these companies for the past 2 years, with some brand-name companies losing market share to generic (also known as private-label) alternatives. In a bid to grow sales volume and market share—and responding to input costs that eased in the past year—some companies slowed their price increases in 2023 and offered more discounts. But this led to decelerating revenue growth in the sector in 2023, which weighed on the stocks even as companies delivered better-than-feared earnings. Higher interest rates also lured many investors toward fixed income and away from dividend-paying stocks.

That is a strong argument that defensive stocks are objectively better investments than other stocks. Warren Buffett also became one of the greatest investors of all-time in part by focusing on defensive stocks. Among the hardest-hit segments was packaged foods and meats, a competitive industry due to the presence of lower-priced private-label alternatives. As input costs eased, brand-name food companies stepped up discounts and advertising spending to attempt to gain market share. Investor sentiment also shifted against this segment due to worries about how new weight-loss drugs might impact demand.

Broadly speaking, consumer staples are essential products that we use daily such as food, beverages, household and personal care products. Furthermore, the information presented does not take into consideration commissions, tax implications, or other transactional costs, which may significantly affect the economic consequences of a given strategy or investment decision. This information is not intended as a recommendation to invest in any particular asset class or strategy or as a promise of future performance. There is no guarantee that any investment strategy will work under all market conditions or is suitable for all investors. Each investor should evaluate their ability to invest long term, especially during periods of downturn in the market.

Bình luận

Leave a comment

This will close in 0 seconds