While consumer staples stocks and sector-specific exchange traded funds have acted as a stabilizing force in a diversified investment portfolio, some investors may be starting to shift out of the relatively defensive asset category.
Investors are moving out of companies that offered steady returns amid a near-zero interest rate environment and heightened market volatility after the strong October jobs numbers strengthened the case for a December interest rate hike, reports Leslie Josephs for the Wall Street Journal.
Over the past week, the S&P 500’s Food Products Index, which tracks many consumer staples food companies, declined 3.1% while XLP fell 2.7% and the PowerShares Dynamic Food & Beverage Portfolio (NYSEArca: PBJ), which targets food and beverage companies, dropped 3.0%. Meanwhile, the broader S&P 500 Index only dipped 1.1%.
“I think that ship has already sailed for now,” Tommy Lackey, a portfolio manager at Barber Lackey Financial Group LLC, told the WSJ. “The consumer is still strong, so this area will still perform OK but not excel like others.”
The consumer staples space, notably food companies, is experiencing slower growth. According to FactSet, quarterly revenues for companies on the food-products index declined 10.5% year-over-year, with 57% of companies having reported. Meanwhile, revenues for S&P 500 companies have dipped 4.6%, with 85% of companies having reported.
Weighing on the industry, soda and cereal revenue in the U.S. contracted about 2% a year over the past two years, according to Euromonitor International.
“Without seeing topline growth, there’s really only one way you can grow, which is through cost-cutting,” Brett Hundley, a food-stocks analyst at BB&T, told the WSJ. “They’ve kind of run out of road to cut cost.”
Merger and acquisition deals are also slowing. There were 178 announced food sector deals in 2015 as of November 4, compared to 236 in 2014 and 265 at the peak in 2012. The Federal Reserve interest rate expectations have raised the outlook for borrowing costs ahead.
The five-year drop in commodity prices, which has helped reduce costs on many food ingredients, is starting to stabilize.
Additionally, some observers believe food stocks are growing expensive relative to the broader market. The S&P 500’s Food Product Index trades at a 22.6 times companies’ past 12 month earnings, compared to the S&P 500 Index’s 18.5 P/E ratio. The XLP has a 21.4 P/E and PBJ shows a 18.5 P/E.
Consumer Staples Select SPDR
For more information on the consumer sector, visit our consumer staples category.
Full disclosure: Tom Lydon’s clients own shares of XLP.
Max Chen contributed to this article.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.