Consumer Staples vs. Cyclicals – Where to Invest?

Investors are paying attention to the health of the US consumer to understand how the US economy is performing after the Coronavirus lockdown. Some of the preferred investment vehicles for retail investors in this space are the SPDR ETFs, such as the Consumer Discretionary Select Sector SPDR Fund (AMEX: XLY) and the Consumer Staples Select Sector SPDR Fund (AMEX: XLP). The key question investors are asking is which one of these should I invest in right now? Smart money traditionally invests in consumer discretionary at the early stage of an economic recovery and invests in consumer staples at the early stages of an economic recession.

Looking at the price action of these two ETFs in 2020, Consumer Cyclicals are up 8.7% and are outperforming Consumer Staples, down 0.44% for the year, by a wide margin. Such price action suggests the market expects the current economic crisis to be relatively short and seems to be positioning for economic recovery by investing more in cyclical consumer stocks.

For more on the health of US retail, see this blog from my colleague Nikki-Lee Birdsey entitled, “How the US Retail Sector Looks Post-Lockdown.”

 

Earnings This Week

This week we get 2Q20 earnings reports from a handful of both Consumer Cyclical and Consumer Staple companies. In Consumer Staples, we hear from Clorox Company (NYSE: CLX) and Tyson Foods (NYSE: TSN) on August 3^rd, followed by Monster Beverage Corp. (NASDAQ: MNST) on August 4^th. In Cyclical’s on August 6^th - Booking Holdings (NASDAQ: BKNG), Ball Corporation (NYSE: BLL), Hilton Worldwide Holdings (NYSE: HLT), and Royal Caribbean Cruises (NYSE: RCL) all report. Analysts expect 2Q to be particularly weak for Consumer Cyclicals, especially for Booking Holdings, whose 2Q earnings estimates have been revised down by 5.6x to a loss per share of $11.87 over the past three months. Out of the cyclical names, analysts only expect Ball Corporation to report positive earnings per share of $0.57. Consumer Staples should fair a bit better. The earnings rating for Clorox is a “strong-buy,” and analysts expect 2Q20 earnings of $2.00 per share, a nearly 7% upward revision from three months ago.

 

US Non-Farm Payrolls

Later this week, we will get another key economic indicator on the health of the US job market with the July non-farm payroll figure, which is a crucial input to consumer sentiment and behavior. Economists predict a payroll increase of 2.3 million jobs in July, following a larger than expected 4.8 million increase in June. Investors will also be keenly watching the unemployment rate, which economists think will drop to 10.3% from a high in April of 14.7%. The market will closely watch the employment report, and a worse than expected figure could weigh down markets. An equally important issue is the status of the Coronavirus relief legislation working its way through Congress. The current federal unemployment benefits package expires this Friday. Failure to pass any additional benefits could be another hit to consumer confidence and the markets.

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Disclaimer: The writer is an experienced financial consultant who writes for Finscreener.org. The observations he makes are his own and are not intended as investment or trading advice.