The consumer discretionary sector is in a slump.
It holds the title as the third worst performer in the S&P 500 index so far this year.
It’s like investors forget that consumer spending jumped 11.8% in Q2, wages are on the rise, and many people have some extra cushion for a rainy day. The consumer has been a driving force in the post-pandemic economic recovery. How could the sector most directly connected to the consumer’s interests be such a laggard?
Sure, the Delta variant has caused the consumer to become a bit more cautious recently. But job openings still far outpace the number of unemployed, and sentiment (often looked at as a recessionary indicator) is still solidly higher year-over-year.
The reason for the slump is a bit complicated for what is typically a straightforward group.
The Elephant in the Room
It would be easy to blame the biggest stocks in the sector for the underperformance — after all, performance is market cap weighted. The stocks with larger market caps will have a greater contribution to a sector’s overall performance.
A few tech-related companies account for almost 50% of this sector. Initially, you might think that would be a good thing. Amazon represents nearly 35% of the market cap of the sector, while Tesla accounts for about 14%. However, Amazon’s and Tesla’s stocks are 7% higher year-to-date. That’s well below the S&P 500’s 20% return over the same time.
Investor sentiment has weighed on the shares of these two stocks despite both companies reporting record revenues and earnings in 2020. Growth is expected to continue into 2021 for both, but investors have left these two prior market darlings behind in favor of other growth stocks or asset classes.
While the performance of these heavyweights certainly impacts the overall performance of the sector, there may be more to the story.
Goods vs. Services
Retailers or apparel companies typically come to mind when you think about the consumer discretionary sector. We’ve all spent plenty of money over the past year on DIY home remodeling projects, furniture, yoga pants and other items we needed (or wanted) as we spent more time at home. After taking a brief dip, spending on goods surpassed pre-pandemic peaks in a matter of five months.
On the flip side, it’s taken a while to return to spending on services. The speed of re-opening has varied by state, and the Delta variant has slowed or reversed some of those plans. That has impacted consumer demand for services. Spending on services has taken much longer to return to pre-pandemic levels, only reaching that milestone in June of this year.
Consumer service companies, which include quick service restaurants, casinos, cruise lines, hotels and travel companies, represent about 16% of the consumer discretionary sector. Companies such as McDonald’s, Starbucks and Booking Holdings have all significantly underperformed the S&P 500 in the past year. The stocks of casino companies Las Vegas Sands and Wynn Resorts have fallen sharply.
Top 10 Largest Consumer Discretionary Companies
|Rank||Company||Industry||% Weight||Year-to-date Performance|
|2||Tesla||Automobiles & Components||14.5%||7.0%|
|3||The Home Depot||Retailing||6.8%||24.9%|
|4||Nike||Consumer Durables & Apparel||5.0%||15.5%|
|5||McDonald's Corporation||Consumer Services||3.5%||11.2%|
|9||Booking Holdings||Consumer Services||1.8%||4.1%|
|10||The TJX Companies||Retailing||1.6%||1.7%|
|S&P 500 Consumer Discretionary Sector||12.9%|
|S&P 500 Index||19.6%|
Source: Ally Invest, S&P Capital IQ
In the near-term, the consumer appears to be growing more cautious as the Delta variant develops. This is being reflected in consumer confidence, retail sales and mobility data. Spending could moderate in the near-term, but as the holidays approach, consumers are likely to return their focus to purchasing goods. The greater risks would be those presented by lingering global supply chain issues, which could limit the amount of goods for sale — thus, constraining retail sales and spending in the final months of the year. Looking forward to 2022, we would expect the propensity to spend to improve and wouldn’t count out a rebound in service spending as well as goods as a new reopening story emerges.
The Bottom Line
Consumers are the engine of our economy, and their resiliency has been key over the past year. While the consumer discretionary sector doesn’t reflect this strength, several individual consumer stocks do. Amazon and Tesla will continue to weigh on the sector until there is a change in sentiment. Until then, a strong holiday season and a re-emergence of interest in services in the year ahead could prove to be what the sector needs to gain momentum.
Sign up to receive the Weekly Viewpoint and other top market insights delivered to your inbox.
Lindsey Bell is Ally’s Chief Investment Strategist, responsible for shaping the company’s point of view on investing and the global markets. Lindsey has a broad background in finance, with experience on the buy-side and sell-side, in research and in investment banking and has held roles at JPMorgan, Deutsche Bank, Jefferies, and CFRA Research.
Lindsey holds a passion for teaching individuals how to become successful long-term investors. She is a contributor at CNBC, and frequently shares her insights with various publications including the Wall Street Journal, Barron’s, MarketWatch, BusinessInsider, etc. She also serves on the board of Better Investing, a non-profit organization focused on investment education.
Click here for more content from Lindsey Bell.