Consumer Staples Sector Continues Slow and Steady Growth Through 2016

There are four consistent destinations whenever the economy degrades and investors seek a "flight to safety."  Bonds typically lead the charge, and you can clearly see investor sentiment by watching the fluctuations in the 10-year bond yield.  When the yield drops, you know investors are fleeing stocks and heading for safety.

Gold is another commodity that tends to benefit from a downturn in the economy, although using it as a flight to safety is a bit precarious.  Despite some very misleading TV commercials by a former presidential candidate, gold is not the safe-haven that urban legend would lead us to believe, yet there is still some correlation to gold prices and overall investor sentiment.  It's not one I watch, however, since gold is influenced by numerous other factors beyond just investor sentiment.

Within the equity market, the Utilities Sector is a traditional safe-haven as well.  Known for higher than average dividend yields coupled with consumer demand regardless of the state of the economy (after all, you still need water, gas, and electricity even in a recession,) investor sentiment clearly drives the overall performance of this sector.  When investor sentiment declines, the Utilities Sector rises, and vice versa.

The fourth safe-haven is the subject of tonight's study, and that's the Consumer Staples sector.  The stocks that comprise this sector are those that produce and sell the products we use on a daily basis. Products such as tooth-paste, toilet paper, soft drinks, snacks, etc.  They're considered the items we cannot do without, and thus are not impacted to a great extent by a downturn in the economy.  The sector includes ten industries: Tobacco, Food Products, Nondurable Household Products, Personal Products, Distillers and Vintners, Soft Drinks, Brewers, Tires, Food Retailers and Wholesalers, and Drug Retailers.  Some of the stocks include big names like Wal*Mart (WMT), Altria (MO), and Philip Morris (PM).  Even when the economy turns south, they are names that do relatively well compared to the market as a whole.

What we have seen thus far in 2016 is a slow-and steady gain in the sector as a whole.  Here's the daily annotated chart, unadjusted for dividends.

Consumer Staples Unadjusted Daily Chart

Through all of 2016, the entire progress of the sector has been a slow and steady upward climb.  Even in the brief pullbacks in April and May, XLP (the S&P Consumer Staples SPDR) continued to make higher highs and higher lows.  The Great Brexit Panic on June 24th and 27th took the sector down a bit - still to a higher low - while the rest of the market sought the highest bridge from which to leap.  It's interesting to note that the low reached on June 27th found support at the lower boundary of the Andrews Pitchfork that has defined all of 2016.

Also of note is that, on June 30th with the market as a whole rebounding, XLP soared through the overhead resistance formed by the prior quarter's triple top.  Since then, despite growing consumer and investor confidence, the sector has continued to rise at a steady pace, neatly following the center line of that same Andrews Pitchfork.

The strong retail sales numbers released last week will provide an added stimulus to many of the stocks in this sector.  Industrial Production and Manufacturing also got a boost on Friday, rising to the highest level in 2016 (although it's been in negative territory since August 2015.)  When you consider both reports, the outlook is very positive for both Consumer Staples (which we must buy no matter what) and Consumer Discretionary (which only really benefits when the economy is doing very well and consumer sentiment is high.)

With the exuberance of the last week, XLP under-performed the S&P 500, which is to be expected.  Remember, it's a safe haven, not an aggressive growth sector, so as investor confidence grows, XLP begins to lag the market as a whole.  That lag, however, still provides excellent opportunities.  The sector as a whole shows a modest 2.86% dividend yield, and the Food, Beverage, and Tobacco industries have a 3.11% yield. (Tobacco leads that charge with a 4.0% dividend yield.) With the sector showing consistent steady growth, even when it is being ignored, the steady income and steady growth is a nice combination.

Keep an eye on both Consumer Staples and Utilities.  For those that wish to remain in equities during economic downturns, they typically provide the safest havens among the S&P sectors.  For traders, they often provide good, short-term swings, while for the longer term investor, they provide steady income with modest growth. 

You will find the details of each of the industries in the sector and all companies in each of the industries on Bloomberg.com's Consumer Staples Sector page.