Indeed, consumer discretionary has led the way in the current bull market. And the increase in consumer credit has had a whole lot to do with it. The question is, would a slide in consumer discretionary share prices be as onerous as the slumps in the aforementioned sector stars (i.e., technology, financials, etc.)?
Probably not.
The consumer may be over-leveraged. And consumers may already be pulling back on their purchases. After all, if middle class Americans were genuinely feeling good about the direction of the economy, you would not see so many retailers (e.g., Wal-Mart, PetsMart, Home Depot, Lowe’s, Staples, etc.) struggling to generate revenue. While one could make the case that tapped-out consumers could foreshadow a recession and/or bear market in stocks, it would be quite the leap to claim that a “consumer discretionary bubble” will shock the S&P for a 50% catastrophe.
Again, U.S. consumers have been relying too heavily on credit for their purchases. And ultra-low rates may be encouraging the activity. That said, investors can steer around any immediate icebergs by avoiding ETFs like SPDR Select Consumer Discretionary (XLY) and Market Vectors Retail (RTH).
Whether the smart money is exiting XLY due to overvaluation concerns, fears of a consumer credit bubble, or business cycle rotation, the money is moving just the same. Energy (XLE) typically performs well in the latter stages of a business cycle and it is outperforming most sector funds today. I would attribute some of that outperformance to investors revisiting the emerging market growth story. If you’re not a big fan of sector investing, you may want to consider participating in equities via a low volatility investment. For instance, iShares USA Minimum Volatility (USMV) may not rocket ahead in a raging bull, but it holds its own nicely during periods of uncertainty.