Bullish Signal Ignites: Consumer Discretionary Stocks Outshine Staples
The stock market is sending a clear message: the ongoing rally is set to stretch into 2025. A key indicator is flashing a bullish signal, suggesting investors are confident in the economy and consumer spending.
A Tale of Two Sectors
Consumer discretionary stocks, which reflect non-essential spending, are outperforming consumer staples stocks, which meet consumers’ necessities. This trend is a hallmark of a solid economy and high consumer confidence. The S&P 500 has a strong correlation with consumer discretionary stocks during bull market advances.
Record Highs Reached
The outperformance of risk-on stocks relative to defensive stocks has hit record highs. Consumer discretionary stocks have reached new highs when measured against consumer staples stocks. This signals that investors are comfortable betting on the consumer continuing to spend their income on goods they don’t necessarily need but want.
Top Performers
Some of the top companies in the consumer discretionary sector include Tesla, Home Depot, and McDonald’s. The top companies in the consumer staples sector are Costco, Walmart, and Procter & Gamble.
Performance Gap Widens
Year-to-date, the consumer discretionary sector is up nearly 3% compared to a 2% decline in the consumer staples sector. Over the past year, consumer staples are up just 7% compared to a 34% gain for consumer discretionary. This trend persists looking back three and five years as well.
Fundamental Drivers
A strong labor market has boosted consumer discretionary stocks, while concerns about GLP-1 weight loss drugs have exacerbated the decline in consumer staples stocks. However, this divergence in performance is typical investor behavior in a bull market.
Correlation with S&P 500
The consumer discretionary sector has a 93% correlation of monthly returns with the S&P 500, compared to a 73% correlation for the consumer staples sector. This confirms the underlying trend pushing stocks higher.
Equal-Weighted Sectors
When accounting for the skewed weighting of Amazon and Tesla in the consumer discretionary sector, the relative performance of the equal-weighted consumer discretionary and consumer staples sectors still suggests a bullish signal.
Technical Analysis
A long-term chart of the relative performance between the two sectors shows that the ratio chart has broken above a key resistance level marked by the stock market peaks in 2007 and 2021. This is ultimately a risk-on signal that suggests the stock market rally will continue.
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