Interested in the consumer staples sector? Look at these 5 considerations.
How might the global political landscape affect the consumer staples sector stocks, mutual funds, and ETFs that concentrate on the sector? For a sector with which most of us participate on a daily basis, the question is not a simple one to answer.
The short answer? “It’s multi-faceted in the current shifting international landscape.” If you’re considering buying or selling the sector, here are five indicators to monitor.
The consumer staples sector includes companies whose products may be less sensitive to the economic cycle, and have traditionally been considered a defensive sector. After all, no matter the phase of the business cycle, consumers will still need to buy food, diapers and other staple products. Shifting out to the international landscape, major U.S. corporations such as Proctor and Gamble (PG), Coca Cola (KO), Wal-Mart (WMT) and PepsiCo (PEP) sell consumer staples products to foreign buyers.
"Consumer staples are countercyclical and less sensitive to swings in the economic cycle. They sell goods in demand no matter what is going on in the broader economy," says Patrick O'Hare, chief market analyst at Briefing.com. "People still have to eat, they get sick and still go to the drugstore, When the market gets a little dicey, consumer staples exhibit relative strength,” O'Hare says.
Typical characteristics of consumer staples investments according to O'Hare:
Here is a look at five indicators investors can monitor now in the shifting international environment that could impact consumer staples sales abroad.
TD Ameritrade clients can monitor that data via the thinkorswim® platform . See Figure 1 below.
FIGURE 1: TRADE BALANCE
In thinkorswim platform, click the “Analyze” tab > Economic Data > Trade Balance: Goods, Balance of Payments. The chart shows the deficit on our balance of payments for goods. Data source: FRED® database, Federal Reserve Bank of St. Louis. Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.
With the broader stock market trading at all-time highs, the consumer staples sector has been stretched by historical comparisons. "The consumer staples sector is trading at a premium to its 5-year and 10-year historical P/E average," O'Hare says. He pointed to FactSet data which revealed that the forward price/earnings multiple for the consumer staples sector stands at 20, which is above the 5-year average of 18 and the 10-year average of 16.1.
"It is trading at a 25% premium to the 10-year average. It is important for investors who may be considering investments in a consumer staples sector ETF to understand the sector may not afford them much capital appreciation right now. But it could possibly offer a good outlet for less capital depreciation in a down market," O'Hare concludes.
In addition to consumer staples mutual fund and ETFs, investors looking to gain exposure in this area could also "trade what you know" Kinahan says. That could include investments in individual companies in this sector that also have a multi-national presence, in order to get broad-based domestic exposure as well as "synthetic" international consumer sales investment, he says.
Use Stock Screener to narrow selections based on sectors like consumer staples. Log in to your account at tdameritrade.com > Research & Ideas > Screeners > Stocks.
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