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Consumer Discretionary stocks outperformed Consumer Staples stocks, sending a risk-on signal to the broader market.
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The gains in the consumer discretionary sector reflect a solid economy and high consumer confidence.
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During bull market rallies, the S&P 500 has been closely correlated with the Consumer Discretionary Index.
The stock market is flashing an under-the-radar bullish signal, suggesting a sustained rally that will continue into 2025.
The signal is simple, but powerful: The performance of risky stocks relative to defensive stocks has hit an all-time high.
Specifically, consumer discretionary stocks have hit new highs compared to consumer staples stocks.
Consumer discretionary stocks are considered risky because they reflect discretionary spending, while consumer staples stocks satisfy consumer staples.
The thinking is that even if the economy slows or contracts, consumers will continue to buy products from companies in the consumer staples industry. At the same time, during tough economic times, they curb spending on non-essential items.
Ryan Detrick, chief market strategist at Carson Group, told Business Insider, "Defensive stocks tend to lead in times of trouble, but we just don't see that. That's a good thing."
Some of the top companies in the consumer discretionary space include Amazon, Tesla, Home Depot, and McDonald's. The top companies in the consumer products industry are Costco, Walmart and Procter & Gamble, which sells toilet paper, soap and diapers.
The widening performance gap suggests that investors are willing to bet that consumers continue to spend their incomes on goods they don't necessarily need but want, given that the economy remains on solid footing.
The performance gap between the two industries is staggering.
Year to date, the consumer discretionary sector is up nearly 3%, while the consumer staples sector is down 2%.
Over the past year, consumer staples rose only 7%, while consumer discretionary goods rose 34%. This excellent performance also persists when looking back three and five years. Meanwhile, the S&P 500 is up 2% year to date and 27% higher than last year.
Arun Sundaram, senior equity analyst at CFRA Research, said that from a fundamental perspective, a strong labor market has boosted consumer discretionary stocks. Meanwhile, concerns about the GLP-1 weight-loss drug exacerbated losses in consumer staples stocks.
"Investors are questioning the long-term impact of revolutionary weight-loss drugs like Ozempic on the food and beverage companies that dominate the consumer staples industry," Sundaram said.
But Sam Stovall, chief investment strategist at CFRA, said that aside from the underlying reasons for the widening gap in performance between the two industries, this is typical investor behavior in a bull market.
"It makes intuitive sense that when the Consumer Discretionary sector goes up, the S&P 500 Index goes up because the Consumer Discretionary sector's monthly returns are 93% the same as the S&P 500's," Stovall told Business Insider. Relevance.”
In comparison, the consumer staples sector has a 73% correlation with the S&P 500, Stovall said.
This is the type of behavior investors want to see during a bull market because it confirms the underlying trend driving stocks higher.
"Looking at industry returns during market ups and downs, Consumer Discretionary outperformed during upswings, while Consumer Staples underperformed," Stovall said.
Michael Batnick, research director at Ritholtz Wealth Management, looked at the equally-weighted Consumer Discretionary and Consumer Relative Performance. Staple food industry.
He liked what he saw.
"I'm not worried about this sell-off at all, and this chart gives me confidence," Bartnick said on this week's podcast.
Bartnick called it "the most bullish chart in the world," adding that "this is not something you see in a bear market."
Ryan Detrick, chief market strategist at Carson Group, told Business Insider that risk appetite signals go beyond the relative performance of consumer discretionary.
Technical analyst and All Star Charts founder JC Parets expressed the same view in an interview with "Compound and Friends" on Thursday.
Parets provides a long-term chart of the relative performance between the two sectors, showing that the ratio chart just broke above key resistance levels marked by the 2007 and 2021 stock market tops.
This is ultimately a risk-on signal that the stock market rally will continue.
"We're not overly concerned that things are going to collapse, as we keep hearing, the end is nigh because the right leadership is still in place," Carson Group's Detrick said.
Read the original article on Business Insider