- Consumer staples sector and related ETFs have recently hit all-time highs
- Defensive consumer staples sector among year’s best performing areas of the S&P 500 as investors turn to more conservative plays in a volatile market
- Recent strength in defensive consumer staples sector does not bode well for the overall market
As the equities markets rebound from uptick in volatility this year, the consumer staples sector and related exchange traded funds have recently hit all-time highs.
The Consumer Staples Select SPDR (NYSEArca: XLP) was 0.5% lower Thursday but broke to an all-time high Wednesday. Year-to-date, XLP increased 3.5%, whereas the S&P 500 was still down 2.2%.
The defensive consumer staples sector has been one of the year’s best performing areas of the S&P 500 as investors turned to more conservative plays in a volatile market, reports Stephanie Yang for CNBC.
Rich Ross, head of technical analysis at Evercore ISI, also pointed out that XLP has formed a bullish technical indicator after the sector broke above its wedged shaped pattern. The recently formed level wedge – the flat top that and upward sloping bottom that marked the higher lows – reflects a period of consolidation, and a breakout would indicate the ETF may not reverse the current major trend anytime soon.
“You probably can’t do much better than owning the staples on this breakout from a multiyear trading range … against the backdrop of a world where yields are extremely low,” Ross told CNBC. “To me that’s a winning combination in a world of heightened macro volatility.”
However, the recent strength in defensive consumer staples sector does not bode well for the overall market.
“The fact [that consumer staples is]hitting an all-time high is not exactly a ringing endorsement for risk taking or the market more broadly,” Ross added.
Erin Gibbs, chief equity investment officer at S&P Investment Advisory, though, warned of the high valuations in the consumer staples after the run up, pointing out that the sector’s price-to-earnings ratio is at all-time highs as well. The consumer staples sector shows a 21 forward P/E, compared to the broader S&P 500’s P/E of 16.
XLP shows a 21.19 P/E and a 4.38 price-to-book. In contrast, the SPDR S&P 500 ETF (NYSEArca: SPY) has a 16.73 P/E and a 2.35 P/B.
Additionally, Gibbs projects the sector’s growth will remain depressed, with 2.5% expected earnings growth and less than 1% revenue growth.
“You can see people really piling in,” Gibbs told CNBC. “This is very much about a flight to safety, stable dividend yields, and obviously trying to avoid some of that volatility.”
Consumer Staples Select SPDR