Consumer Discretionary Sector Rating: Neutral
The Consumer Discretionary sector—which is typically sensitive to swings in the economy—had its winners and losers with the onset of the COVID-19 pandemic continues to be underpinned by the ongoing economic expansion. The massive stimulus efforts and stay-at-home orders spurred a surge in spending on home improvement and e-commerce sales early in the crisis. While that pace has slowed, higher wages and a boom in house prices continues to support demand.
With much of the economy now reopened, many of the most beaten-up stocks in the sector—like those in the apparel and hotel industries—have recovered much if not all of their crisis-related losses. The cruise industry and some hotels have been exceptions, as the COVID-19 delta variant remains a headwind. But these industries are often overshadowed by bigger companies in the sector—like Amazon and Tesla—that constitute more than 40% of the sector’s market cap. The longer-term trend toward e-commerce and electric vehicles is likely to continue to support the fundamentals of these growth industries, but investor enthusiasm may have pushed valuations too high. Additionally, a severe semiconductor shortage is an ongoing risk to the production of vehicles, although investor interest in electric vehicles has underpinned the automotive industry indices.
Positives for the sector:
- Increased return-to-work, less social distancing and ongoing economic expansion are positive for many of the more traditional Consumer Discretionary industries
- The shift away from brick-and-mortar stores is likely to continue to support fundamentals for online retailers
- The sector typically benefits from pro-cyclical macroeconomic tailwinds when the economy is improving, although it hasn’t traditionally outperformed in the expansion phase of the business cycle
Negatives for the sector:
- The sector is overly concentrated in internet retail and automobiles
- Valuations appear stretched
- Semiconductor shortages weighing on auto and consumer electronics production
Risks for the sector:
- Antitrust action is possible for the largest online retailer
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*
- Neutral: no current view on likely relative performance
* As represented by the S&P 500 index
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