Market Commentary | December 16, 2021

Consumer Discretionary Sector Rating: Neutral

The Consumer Discretionary sector includes automobiles and auto components, consumer durables and apparel (household durables, leisure products, textiles, apparel and luxury goods), consumer services (hotels, restaurants, and leisure, and diversified consumer services) and retailing (distributors, internet and direct marketing retail, multiline retail and specialty retail). 

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

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. Clients can log in to see our top-rated stocks in the Consumer Discretionary sector.

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