As Recession Fears Mount, Consumer Discretionary Could Falter

Recession fears continue to mount in the capital markets, pushing more investors to safe havens like consumer staples. Likewise, traders could be looking for shorting opportunities such as consumer discretionary plays.

In an economic downturn, consumers are tightening their belts as opposed to spending on luxury goods, trips, and the like. In times like this, short sellers are retreating from consumer staples and salivating at opportunities in consumer discretionary.

“Short sellers are backing away from consumer staple stocks and keeping bets against consumer discretionary near their 2022 highs, a sign that investors are turning to defensive stocks as interest rates rise and the odds of a recession remain elevated,” a S&P Global article noted.

Discussion surrounding a potential recession was already brewing ahead of 2023. The Federal Reserve was walking a tightrope in terms of trying to balance interest rate hikes while trying not to upend the economy.

Now that a recession looks more likely, bets are ramping up on consumer discretionary shorts and vice versa for consumer staples. S&P Global noted that March data is already reflecting this change.

“At the end of March, short interest in the consumer staples sector was at 3.4%, well below the average of 5.6% throughout 2022, according to the latest S&P Global Market Intelligence data,” the article said. “Short interest in consumer staples peaked at 7.7% at the end of May 2022. Short interest in consumer discretionary stocks, the most shorted group as US inflation has remained persistently high, was at 5.8% at the end of March, near its 6% average in 2022.”

Keep an Eye on WANT

With markets recovering from 2022’s bearish performance, the Direxion Daily Consumer Discretionary Bull 3X ETF (WANT) has been benefiting thus far this year. The fund is up almost 40% for the year, but it may be time to back off should a recession hit consumers.

WANT seeks daily investment results equaling 300% of the daily performance of the Consumer Discretionary Select Sector Index. The index is provided by S&P Dow Jones Indices and includes domestic companies from the consumer discretionary sector, which includes the following industries: media; retail (specialty, multiline, internet, and catalog); hotels, restaurants, and leisure; textiles, apparel, and luxury goods; household durables; automobiles; automobile components; distributors; leisure equipment and products; and diversified consumer services.

The fund is certainly one to keep an eye on as the economic picture continues to paint itself through the rest of 2023. If the Fed is successfully able to guide the economy to a soft landing, consumer confidence could return, and thus, demand for consumer discretionary items could increase.

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