To The Moon

Since the post-pandemic period, we have seen US economy growing and we have seen Real gross domestic product rose 3.2% in the last quarter of 2023, according to the Bureau of Economic Analysis’ advance estimate, after rising 2.6% in the fourth quarter of 2022.

With consumer spending set to increase, investors would be looking to buy stocks that might benefit from higher disposable incomes. One place that we can look at is Consumer discretionary stocks, but I would like to bring our attention to look at ETF instead.

What are consumer discretionary stocks?

The Global Industry Classification Standard divides the stock market into 11 sectors, and two of them consist of companies that sell goods to people. The consumer staples sector contains companies that sell “needs,” like food and hygiene supplies. The consumer discretionary sector, on the other hand, contains companies that sell “wants.”

Consumer discretionary stocks are also called consumer cyclical stocks, as they’re sensitive to changes in disposable income caused by economic cycles of expansion and recession.

Pros and cons of investing in consumer discretionary stocks

The returns on the consumer discretionary stocks shown above might look appealing, but it’s important to understand that the consumer discretionary sector — like any other sector — has unique upsides and downsides as an investment.

Pros of consumer discretionary stocks

• Strong performance when interest rates are low: Consumer discretionary companies make their money from consumer spending, and low interest rates are meant to stimulate that spending. Between December 2008 and December 2015 — a period when interest rates were near zero.

$Consumer Discretionary Select Sector SPDR Fund(XLY)$ has rose more than 280% and outperformed the S&P 500 index. This is a good time to look at this fund, because there is upcoming interest rate cut, which will set to benefit this fund.

If we look at how XLY have performed recently, there have been good buying interest for this fund and we do not foresee any dipping of the sentiment and hence the price.

• Familiar companies: The legendary investor Warren Buffett has often advised people to only invest in businesses that they understand. Unlike, say, the materials sector or the industrials sector, the consumer discretionary sector is made up of well-known brands with products that are at least somewhat familiar to most people.

Some of the well-known brands would be $Johnson & Johnson(JNJ)$ and this brand is innovating with the acquisition talks of Shockwave Medical.

Cons of consumer discretionary stocks

• Recession risk: As discussed, “consumer discretionary” roughly means “nonessential spending.” It is among the first things people cut back on when times get tough.

The Consumer Discretionary Select Sector SPDR Fund lost more than 30% of its value during the Great Recession, in line with the S&P 500 index. We should not be too concerned as recession possibility and risks should be low.

According to FRED, we are seeing smoothe U.S. recession probabilities.

• Interest rate risk: Low interest rates can boost some sectors, and that can include consumer discretionary stocks. But conversely, high interest rates can hurt them. The consumer discretionary sector has a higher debt-to-equity ratio than any other GICS sector, meaning it feels the most pain when borrowing costs go up.

This might be of less worries now, as we look forward to the rate cut, though it might happen in the second half of this year.

S&P 500 Consumer Discretionary Index Performance Rising 1.10%

S&P 500 Consumer Discretionary Index has given a pretty good performance over the past day, rising 1.10%. I believe we should be seeing more interest in the consumer discretionary as we see inflation softening.

If we look at how the index have been performing, there is signs that it would stay upside for quite some time.

Summary

I believe that while we await for Fed clear direction on how they intend to move with inflation data, the increase in GDP and consumer spending should encourage the interest in consumer discretionary stocks.

We can always take advantage by taking an early position in the $Consumer Discretionary Select Sector SPDR Fund(XLY)$

Appreciate if you could share your thoughts in the comment section whether you think consumer discretionary stocks would be the ones that would power up the market while investors wait for inflation data.

@TigerStars @Daily_Discussion @Tiger_Earnings @TigerWire appreciate if you could feature this article so that fellow tiger would benefit from my investing and trading thoughts.

Disclaimer: The analysis and result presented does not recommend or suggest any investing in the said stock. This is purely for Analysis.