Consumer discretionary stocks are outperforming consumer staples in a sign of risk to the broader market.
Gains in the consumer discretionary sector reflect a solid economy and high consumer confidence.
The S&P 500 is strongly correlated with consumer discretion during bull market runs.
The stock market is flashing an under-the-radar bullish signal that suggests the current rally will extend into 2025.
The signal is simple but powerful: the outperformance of risk stocks relative to defensive stocks has reached record levels.
In particular, consumer discretionary stocks hit new highs compared to consumer staples stocks.
Consumer discretionary stocks are considered risky because they reflect unnecessary spending, while consumer staples stocks meet consumer needs.
It is thought that consumers will continue to buy products from companies within the consumer staples sector even when the economy slows or declines. At the same time, they rein in their spending on discretionary items in times of economic distress.
“Defensive stocks tend to lead when there’s trouble, and we just don’t see that,” Ryan Detrick, chief market strategist at Carson Group, told Business Insider. – That’s a good thing.
Some of the top companies in the consumer discretionary sector include Amazon, Tesla, Home Depotand McDonald’s. Leading companies in the consumer products sector are Costco, Walmartand Procter & Gamblewhich sells toilet paper, soap and diapers.
The widening gap in performance signals that investors are betting easily on consumers continuing to spend their income on goods they don’t necessarily need but want, given that the economy remains on solid foundations.
The difference in performance between the two sectors is staggering.
Year-to-date, the consumer discretionary sector is up nearly 3% compared to a 2% decline in the consumer staples sector.
And over the past year, consumer staples grew by just 7% compared to 34% growth for consumer discretionary. Outperformance is still present looking back three and five years. Meanwhile, S&P 500 it grew by 2% since the beginning of the year and by 27% compared to last year.
From a fundamental perspective, Arun Sundaram, senior equity analyst at CFRA Research, told Business Insider that a strong labor market has boosted consumer discretionary stocks. Simultaneously, concerns about GLP-1 weight loss drugs have worsened the decline in stocks of basic consumer goods.
“Investors are questioning the long-term impact of revolutionary weight-loss drugs like Ozempic on food and beverage companies, which dominate the consumer staples sector,” Sundaram said.
But putting aside what’s fundamentally driving the widening gap in performance between the two sectors, according to Sam Stovall, chief investment strategist at CFRA, this is typical investor behavior in a bull market.
“Intuitively, it makes sense that when the consumer discretionary sector goes up, so does the S&P 500, since the consumer discretionary sector has a 93% correlation of monthly returns with the S&P 500,” Stovall told Business Insider.
Comparatively, the consumer staples sector has a 73% correlation with the S&P 500, according to Stovall.
This is the type of behavior investors want to see during a bull market, as it confirms an underlying trend that is pushing stocks higher.
“When looking at sector returns during market ups and downs, consumer discretionary performs better during the upswing and consumer staples underperforms,” Stovall said.
To explain Amazon and Tesla’s skewed weighting in the consumer discretionary sector, which together make up about 40% of the sector, Michael Batnick, director of research at Ritholtz Wealth Management, looked at the relative performance of equally weighted consumer and consumer discretionary. paper clip sectors.
He likes what he sees.
When the line on the chart moves up, it signals that consumer discretionary stocks are outperforming consumer staples stocks, and vice versa when it moves down.Compound
“I’m not worried this sale at alland this is a chart that gives me confidence,” Batnick said podcast this week for The Compound.
Batnick called it “the most bullish chart in the world,” adding that “this is not something you see in a bear market.”
Ryan Detrick, chief market strategist at Carson Group, told Business Insider that the risk signal isn’t limited to the relative performance of consumer discretionary
JC Parets, technical analyst and founder of All Star Charts, echoed the same sentiment when speaking with The Compound and friends on Thursday.
Parets provided a long-term chart of the relative performance between the two sectors, showing that the ratio’s chart has just broken above the key resistance level marked by the stock market’s 2007 and 2021 highs.
When the line on the chart moves up, it signals that consumer discretionary stocks are outperforming consumer staples stocks, and vice versa when it moves down.All star charts
This is ultimately a risk sign that suggests the stock market will continue to rise.
“We’re not too concerned that things are breaking down and the end is near as we keep hearing, since the real leadership is still in play,” said Detrick of the Carson Group.
