The Consumer Staples Select SPDR (NYSEArca: XLP) has started to perk up after a lengthy slumber that saw the once red hot sector falter on valuation and interest rate concerns. Over the past week, XLP is higher by 3.2%, bringing its year-to-date gain to 5.3%.
Amid fears of rising interest rates and concerns that the sector is overvalued even relative to its lofty historical norms, the consumer staples sector has recently encountered some headwinds.
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.
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).
Still, some analysts are not too enthusiastic on staples stocks. On Tuesday, Deutsche Bank lowered its ratings on a slew of big-name staples stocks, including some marquee XLP holdings citing “broad macro factors (F/X,USD, stronger economy = flight out of safety) that could apply to a host of multinational consumer staples sellers.”
Deutsche downgraded to hold from Procter & Gamble (NYSE: PG) and Coca-Cola (NYSE: KO), two of XLP’s largest holdings. The bank also lowered its price targets on both names.
“With the strong dollar, f/x should again clip expected outsized earnings growth at the multinationals which should help the more commodity exposed, domestic names unless we are entering an anomalous period of a strong dollar and rising commodities,” said Deutsche Bank.
Related: Sticking With Staples ETFs: Is it a Good Idea?
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.
Earlier this year, defensive sectors, such as staples, were leaders, but that trend has reversed. The cyclical energy and technology sectors are now this year’s best-performing groups. That could be further confirmation investors expect interest rates to rise because cyclical sectors usually perform well as borrowing costs increase.
For more information on the consumer sector, visit our consumer staples category.