Among the sectors vulnerable to rising interest rates, real estate and utilities are arguably the usual suspects, but investors would do well to view consumer staples stocks through a similar lens.
The Consumer Staples Select SPDR (NYSEArca: XLP) saw $271 million in net outflows over the past week, according to ETF.com and XLP, the largest consumer staples exchange traded fund by assets, has 3% over the past 10 days. That could be a sign investors are treating staples stocks as potentially vulnerable as the Federal Reserve inches toward a December rate hike.
XLP and rival staples ETFs have already had their hands full this year with rising rate-related issues. For example, several of the largest staples names have reported lackluster earnings, blaming the strong dollar for weak overseas currency conversions. The dollar has been rising in anticipation of the Fed boosting borrowing costs.
“Margins appear to be getting squeezed this year, and the strong USD isn’t helping things by acting as a headwind to revenue growth from abroad, resulting in a forecast decline in EPS this year. Estimates for next year look better. In any case Consumer Staples stocks have seen their P/E multiples expand considerably over the last five years. As a result these stocks appear rather expensive, and Staples has an UNDERWEIGHT recommendation,” according to AltaVista.
There are other issues to consider as well. 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. [Changing Appetites Hurt Staples Stocks]
“Even conservative yet higher-yielding consumer staples stocks such as tobacco and food felt the bear’s presence. The shift toward financials and away from income producers was clear. And that is the market’s best argument that the Fed will raise rates next month, despite what other central banks may have planned,” reports Michael Kahn for Barron’s. http://www.barrons.com/articles/with-rate-hike-looming-here-are-winners-losers-1447100569
Consumer Staples Select Sector SPDR
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.