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I can’t remember the movie's name, but I can relate to the opening scene. The guy is on an eight-lane highway in bumper-to-bumper traffic and keeps picking the wrong lane. Every time he changes lanes, the lane he just left starts passing him. Investors might be tempted to jump on the hot Consumer Staples trend right now, but like the guy in traffic, they might get passed by the sector they just left.
The Consumer Staples sector is up over 12% year-to-date, ranking third after energy (20%) and materials (15%) among the eleven S&P 500 sectors. It’s tempting to overweight one's portfolio in that direction, but it might not be the best strategy.
Stocks in the Consumer Staples sector are known for stability. They sell products essential to daily life, such as food, beverages, toilet paper, and other hygiene items. Another way to describe them is that they are everything stores run out of before a big snowstorm. These products are considered non-cyclical, meaning they stay in demand regardless of economic fluctuations.
We are seeing several sectors benefit as portfolio managers continue to rotate funds out of technology, which had gotten overweighted by strong growth. Consumer Staples have received renewed attention from investors who are looking for defensive and/or income-oriented opportunities, along with Energy (after the Venezuela drama a few weeks ago), Real Estate, and Utilities.
The technical analysis trends for Consumer Staples have improved, making it a tempting tactical buy opportunity. Still, I’m not chasing that trend because they trade at a 10% premium to the rest of the market.
Consumer Staples are known as slow growers. We saw something like this as the COVID shutdowns began when toilet paper and other essentials flew off the shelves, pushing profits up only to fall soon afterwards because, as it turns out, people continue to use the same amount of toilet paper. When consumers have a surplus, they don’t buy any more toilet paper until they've used it up. As hot as Consumer Staples look now, earnings reports are expected to show no earnings growth last year. Analysts estimate its 2026 growth at 7%, and the sector is already up nearly twice that currently. (Did I mention people typically use the same amount of toilet paper as they usually do?)
When most stocks are overvalued, as they are now, investors need a sniper-like mentality when seeking opportunities. The bottom line is that I think other non-tech, neutral-rated sectors look more appealing, such as healthcare and industrials. I am staying neutral on Consumer Staples and leaning in on Healthcare and Industrials.
I manage a lot of company retirement plans. Something I see every January is employees looking at their statements and moving their entire account to the mutual fund with the highest return the previous year. When they do this, they are almost always buying at the top, and that fund has only one way to go: down. Just like the guy in the traffic jam, while the intentions are good, it can lead to you missing opportunities had you just stayed in the middle.
\#consumerstaples
\#sectorrotation
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