The  Consumer Staples Select Sector SPDR Fund (XLP), the largest consumer staples ETF, and rival staples ETFs are soaring this year as investors embrace defensive sectors. Regarding XLP, that fund is higher by 20% year-to-date, but some market observers are concerned that the consumer staples sector’s valuations are becoming stretched.

Consumer staples, health care, and industrial sectors typically outperform during the so-called slowdown period of a business cycle when economic growth starts decelerating but remains positive, the economy runs beyond its full capacity and monetary policy becomes restrictive.

“I do think there are better places to be in the market,” said Nancy Tengler, chief equity strategist at Tengler Wealth Management in an interview with CNBC. “These valuations are pretty stretched.”

Investors typically shift into consumer staples during bouts of market volatility because of the sector’s relatively generous dividend payouts and the slow-and-steady nature of the consumer staples business – consumers usually continue purchase basic products that staples firms sell regardless of market or economic conditions.

Another Lift For XLP

XLP traded modestly higher Tuesday when its largest holding, Dow component Procter & Gamble Co. (NYSE: PG), rallied after delivering another impressive earnings report. Procter & Gamble reported earnings per share of $1.37 from revenue of $17.8 billion. Analysts were expecting earnings of $1.24 a share on sales of $17.4 billion.

“P&G also raised its outlook for sales growth to between 3% to 5% from a prior range of 3% to 4%. It also now expects organic sales growth of between 3% and 5%, up from the prior range of 3% to 4%,” according to Barron’s.

However, P&G’s boffo earnings report could add to the case that the consumer staples sector is getting expensive.

“Tengler said that while she doesn’t believe September’s unexpected drop in retail sales ‘is indicative of a weakening consumer,’ a number of the stocks behind consumer-facing companies appear to have lofty valuations,” according to CNBC.

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Consumer staples are the products that people use frequently and occupy a significant chunk of the average household’s budget. The sector provides the goods that shoppers typically consume on a weekly or even daily basis, and many will continue to purchase these products even during a recession.

Some signs are emerging investors agree with the notion that staples are getting expensive. For the week ended Oct. 18, XLP saw $162 million in outflows.

For more information on the market sectors, visit our sector ETFs category.

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.

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