This makes consumer staple stock an attractive proposition for many traders and investors who are looking to better balance their portfolios with more stable, non-cyclical stocks. This level of stability makes consumer staples well suited to longer-term trading and investing strategies. Financial advisors would recommend that non-professional investors take a diversified approach. Rather than buying individual stocks, experts suggest choosing a well-diversified consumer discretionary index fund or exchange-traded fund (ETF). Use the fund screener tools available on your brokerage platform to find the best options.
- Most portfolios also typically don’t own commodities, which will tend to do well in an inflationary environment.
- The company is the largest producer of soap in the world, but it also makes countless other goods, including Lipton teas and Ben & Jerry’s ice creams.
- Consumer staples, like food, water and personal items, are necessary for daily living.
- Created in 1957, the S&P 500 was the first broad U.S. market-cap-weighted stock market index.
- These examples demonstrate the breadth and importance of consumer staples in our daily lives.
And most portfolios – because they generally own mostly stocks while sprinkling in some bonds – are vulnerable under this situation because both underperform in real terms under such an environment. This causes the market to go from discounting a higher level of spending to a lower level of spending. Most portfolios are not very well prepared for inflation because they’re long a mix of stocks and bonds. The majority of both asset classes perform poorly when inflation runs above expectation. The high nominal GDP growth came from lots of fiscal spending while central banks pinned short-term rates at very low levels as well as longer term rates through QE programs.
Consumer staples sector historical performance
However, spending on goods produced and sold by the consumer staples sector tends to be far less cyclical due to the lessened price elasticity of demand. Price elasticity is an economic concept that describes the change in consumer quantity demand as prices change. The demand for consumer staples goods remains fairly constant regardless of the state of the economy or the cost of the product. While ratios provide a good starting place, it is also important to dig into the fundamentals of a stock. The strength of a brand significantly impacts sales within the consumer staples sector. Consider any major brand and how its robust image contributes to market presence.
Personal product companies
But for someone in the financial markets receiving that stream of income, it’s just cash flow. Long-duration equities like low-/no-earning tech which perform well in the early cycle start to give way to lower-duration (lower earnings multiples) stocks like consumer staples. To bring more stability to a portfolio, we can limit our allocation to more cyclical forms of cash flow and increase allocations to sectors that generate more stable cash flow. Other stocks in consumer staple industries include consumer food manufacturers (e.g., General Mills), consumer tobacco manufacturers (e.g., Phillip Morris International), and consumer beverage (e.g., PepsiCo).
According to the S&P Dow Jones Indices, for most of the 10 years ending April 26, 2021, the consumer staples sector returned 8.20% annually. Comprising nearly 70% of the nation’s gross national product (GNP), consumer spending holds a lot of sway over the economy. Economic growth and decline are typically etoro broker review led by consumer spending, which is cyclical. Cyclical means there are ebbs and flows, or times when the consumer spends more and periods when they have more conservative spending habits. A policymaker will have to worry about how much of that is real growth and how much of that is inflation.
Understanding consumer staples stocks
There are certain ETFs that make it easier than buying individual foreign bonds (e.g., EMLC) but for many traders there’s an availability issue. So even in a terrible recession people are still largely going to pay their utility bills. Food producers and beverages are best fx choice review off, which makes sense because it’s the most basic need. What you can do is measure how stable the amount of spending is on a good or service when aggregate spending behavior changes. Still, there’s some blurriness in terms of what’s a need and what’s more discretionary.
If the economy goes into recession and consumer confidence declines, restaurant sales are going to suffer because people choose to eat in instead of dining out. There are also futures dedicated to the sector, which can provide access at lower capital requirements, such as IXR (Globex). Utilities, a separate sector that’s staples-like in nature, goes under IXU on Globex. The company is the largest producer of soap in the world, but it also makes countless other goods, including Lipton teas and Ben & Jerry’s ice creams. Unilever stands out for its poor environmental record, though it has recently announced plans to drastically reduce its footprint before the end of the decade.
In doing so, it reaches beyond the S&P/NZX 50 Index, expanding the opportunity set while still utilizing size and liquidity criteria to support investability. Using a single purchase, you can use a consumer staples index fund, mutual fund or ETF to invest in various consumer staples. As the AI market heats up, investors who have a vision for artificial intelligence have the potential to see real returns. Learn about the industry as a whole as well as seven companies that are getting work done with the power of AI. For example, you can take variations in the employment rate as a proxy for falls in income. Then you can look at how that impacts spending in different types of products and services in the economy.
That’s why they’re often considered defensive safe havens during a recession. When investing in consumer staples stocks, it’s vital to consider the tax implications and adopt tax-efficient strategies to optimize returns and minimize tax liabilities. Two primary tax considerations for these investments are capital gains taxes and dividend taxes. The profit margins ifc markets review on consumer staples products are razor thin, providing stocks in the sector with very modest opportunities for growth. In periods when the economy is doing well, consumer staples stocks may underperform other more dynamic sectors. Consumer staples, by definition, are the essential goods and services that people consume regardless of their financial situation.