Introduction to the different sectors in the stock market
Since there are enormous numbers of stocks in the stock market, they must be classified into different sectors so that it becomes easier to stalk the different sectors. The stocks are not just classified based on the sector they belong but also by their market capitalization. The various sectors in the stock market are Financials, Utilities, Consumer Discretionary, Consumer Staples, Energy, Healthcare, Industrials, Technology, Telecom, Materials, and Real State. All these stocks even have their indexes and ETFs by which one can get an overview of how the sector is performing. In the following sections, our discussion will be confined to consumer discretionary.
What is the Consumer Discretionary sector?
Consumer Discretionary companies are those companies that produce products which are not essential for the consumers to purchase. The consumer discretionary goods include automobiles, clothing, entertainment products and services, and restaurants. These are the facilities the companies provide to their consumers. And, these facilities are not necessary for the consumers. It is the choice of the consumer if they wish to purchase or not. Therefore, these sectors usually do well in developed countries and in developing countries whose economy is quite good. These companies don’t perform well in the underdeveloped countries, and weak economies as people would prefer keeping their extra money as savings rather than spending it on luxury.
Industries that under the consumer discretionary sector
- Automobile Industry: It is a very well know industry which manufactures, designs, and markets car, buses, and trucks and other vehicles. This is an industry which requires an immense amount of capital. There has always been a demand for this industry; hence, it usually performs well in the market. The only issue with the industry is the increasing competition.
- Hotels and Restaurants: These are the companies that that run hotel, and fast food services. This industry, similar to the automobile industry, always does well in the business. There is always a requirement of fast food services; hence, these companies sustain in the business. Also, the capital for setting up Hotels and Restaurants is quite less.
- Media Industry: This is basically the entertainment industry which provides content such as movies, TV shows, magazines, and radio. In developed countries, this industry is doing at its best.
- Apparel industry: This industry manufactures clothes, footwear, and other accessories such as handbags, and eyewear. Again, this industry is doing exceptionally well in developed economies.
The consumer discretionary companies and the state of the economy are closely related. The performance of the consumer discretionary companies, to an extent, determines the economy of the country. Hence, this sector can be regarded as an indicator which predicts the future economic conditions of a nation.
In weak economies, the income of the people is mostly spent on basic needs. There are very few families who are able to secure some savings. Hence, the demand for consumer discretionary goods is very less, indicating that the economy is bad. As less the purchases become, worse, the economic conditions get.
Talking about the developing countries, when people’s economic status is seen to improve, they tend to purchase more and more amount of consumer discretionary goods, which increases the overall sales of the consumer discretionary companies. Hence, their stocks perform well, and as does the economy of the nation.
Difference between the consumer discretionary sector and the consumer staples sector
While both the sectors produce goods for the consumers, there is a thin line difference between the two. The consumer staples sector consists of those companies which produce goods that are very necessary for the consumers and the consumers buy them on a regular basis. On the other hand, as previously discussed, consumer discretionary companies produce goods which are not as necessary as the consumer staples goods.
Impact of consumer discretionary sector on the interest rates
Consumer discretionary companies have a sensitive effect on changes in interest rates. A rise in the interest rates implies a stronger economy, which in turn means better employment and higher wages to the employs. And, as the wages of consumers increases, they tend to spend comparatively more money on these consumer discretionary goods and services. Hence, the sector is benefitted by the rise in interest rates.
Factors that affect the consumer discretionary sector
There is a mix of both positive and negative factors that affect the sector.
The positive factors include:
- A decrease in the unemployment rate in the developed economies: In the developed countries, there is always a growth in employment, which increases the demand for consumer discretionary goods.
- Wage growth: similar to the above factor, there is regular wage growth in the labour market, which again benefits the consumer discretionary sector.
While the negative factors include:
- Increased retail competition: With the introduction of online shopping, the margins of the consumer discretionary companies are severely affected. This, in turn, affects the stock prices as well.
- Trade disputes: Due to the trade conflicts between America and China, China could raise costs for America producers and increase prices for consumers, or even compress margins for that matter.
- Evolving consumers: According to the retail sales report, it is observed that the consumers have changed their spending habits, which has unpleasantly affected the consumer discretionary sector.
Info on Consumer discretionary index
In the United States, the S&P 500 Consumer Discretionary index is an index that is composed of stocks that belong to the consumer discretionary sector. For example, Advance Auto Parts, Chipotle Mexican Grill, O’Reilly Automotive Inc., Amazon.com Inc., and Under Armour Inc. are some the largest well-performing companies in the S&P 500 Discretionary index. If an investor willing to invest in this sector can invest in the consumer discretionary ETFs, which tracks the sector’s index and can be traded just like another stock. For example, Consumer Discretionary Select Sector SPDR Fund, Vanguard Consumer Discretionary ETF, and Fidelity MSCI Consumer Discretionary Index ETF are some the well known ETFs one can consider investing into.