Consumers stocks are issued by businesses that produce or sell products that the everyday person purchases regularly. There are two categories of consumer stock, both with their own challenges, benefits, and pricing cycles.
When we say, “consumer stocks,” we’re talking, broadly, about the goods that you need or want on a regular basis. We can divide this group into two types: consumer staples and consumer discretionary goods.
Consumer staples are the items you can’t (or won’t) live without, regardless of your financial situation. Common examples include groceries, alcohol and tobacco, personal care items, and household necessities. Companies that work in the farming and pharmaceutical industries also fall under this umbrella.
Consumer discretionary goods are the items that are quasi-essential but not absolutely necessary. These include items such as computers, entertainment, cars, and fast food. Some industries that produce goods required for modern living, but not for life, also belong in the discretionary category. (Clothing manufacturers are one such example.)
Consumer stocks of both stripes can provide unique benefits to an investors’ portfolio. This is, in part, because of when they peak in the broader economic cycle.
As a rule, consumer staples are non-cyclical, which means they’re always in demand. Because most people can’t (or won’t) cut these items from their budgets, staple industries are nigh on impervious to price elasticity and broader business cycles.
This means that, during periods of recession or sluggish growth, consumer staple spending may slow. But it won’t grind to a halt. In fact, some periods of recession have seen consumer staple stocks leapfrog ahead of more exciting industries.
Consumer discretionary stocks, on the other hand, are cyclical securities, which means they respond to economic cycles. As a rule, consumers worried about their finances spend less on frivolity, while consumers secure in their financial situations are more likely to splurge.
Thus, in periods of economic downturn, consumer discretionary spending often spearheads the broader market decline. This leads to car companies, clothing conglomerates, and the entertainment industry slowing, or even experiencing negative growth. But when the market expands again, discretionary stocks lead the charge into recovery.
For those investors looking to dabble in consumer securities, it’s important to note that each sector comes with its challenges and benefits.
On one hand, we have consumer staples. As these are buoyed by consistent demand, they in turn generate consistent revenues, are more impervious to recessive declines, and may experience above-market performance in some economic downturns. Additionally, consumer staples often offer high dividend yields and (for some) consistent payout increases.
However, staple stocks are also typically slow growing, even in the best of economies. They also have limited price highs and may underperform the market when interest rates rise.
On the other hand, we have consumer discretionary stocks. These cyclical investments may outperform the broader market in a robust economy but experience a fair amount of spring back during periods of recession. (Unless, it seems, in case of a worldwide pandemic shifting the status quo to a work-from-home arrangement.)
As a result, they’re more volatile than staple stocks, and can experience both exorbitant highs and catastrophic lows in short periods of time.
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