The Consumer Staples Select SPDR (NYSEArca: XLP) and rival consumer staples exchange traded funds were stellar performers in the first half of this year, but much of that ebullience has faded in recent months.
Concerns about the sector’s lofty valuations and the Federal Reserve raising interest rates in December, which would have likely pinched rate-sensitive defensive sectors, have recently plagued staples stocks and XLP.
However, Donald Trump’s surprising victory in Tuesday’s presidential election could mean defensive sectors, including staples are worth revisitng.
Defensive sectors often trade at premium valuations relative to the broader market and that is certainly the case at the moment with the consumer staples and utilities groups.
That does not mean investors should flee richly valued groups such as consumer staples and utilities. In fact, the case for these higher-yielding sectors could be getting a boost as bond markets are pricing in diminishing chances of the Federal Reserve boosting interest rates next month. In fact, many market observers believe Trump’s victory means the Fed cannot proceed with raising borrowing costs this year.[related_stories]
Rivals to XLP, which also have substantial exposure to food stocks, include the Vanguard Consumer Staples ETF (NYSEArca: VDC) and the Fidelity MSCI Consumer Staples Index ETF (NYSEArca: FSTA). Many of the marquee holdings in the holdings are slightly to clearly richly valued relative to the broader market.
“A quick look at P/E ratios tells us immediately that most companies in the sector are similarly priced with P/E ratios close to the S&P 500 average of 23.99. Some companies, like Newell Brands (NYSE: NWL), have higher P/E ratios but by normalizing earnings and excluding one-off events, those P/E ratios fall into the 20 to 30 range,” according to a Seeking Alpha analysis of consumer stocks.
Related to interest rate speculation, there is another problem for staples stocks: The rising dollar. Over the past several weeks, the greenback has caught fire, which is not good news for the staples sector because many of the names found in ETFs like XLP generate significant portions of their sales in international markets.
Good news for XLP and friends: Trump’s victory weighed on the dollar.
“Consumer staples and discretionary stocks have similar valuations, but rising consumer debt suggests rebalancing towards staples is less risky,” adds Seeking Alpha.
For more information on the consumer sector, visit our consumer staples category.
Consumer Staples Select 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.