The Consumer Discretionary Sector’s Recent Success

Consumer_Discretionary

While the US stock market overall is back where it started the year, the consumer discretionary sector has gained about 10%. That makes this sector, comprised of companies that sell “non-essential” products to consumers (and therefore includes retailers, carmakers, and media companies, among others), the top-performing stock market sector so far in 2015. Will consumer discretionary stocks be able to build on their gains and continue outperforming the rest of the stock market? Answering that question requires understanding what’s driven the sector’s recent success.

Much of the sector’s gains are likely the result of the fairly strong economic environment. The Bureau of Labor Statistics estimates that the US economy added 211,000 jobs in November, the 62nd straight month of job growth. The unemployment rate has fallen to 5%, half the peak level it reached in late 2009 in the aftermath of the global financial crisis.

At the same time, declining commodity prices have helped keep the inflation rate subdued. The oil price in particular has declined dramatically since the middle of 2014, with the price of crude oil recently nearing an 11-year low. The combination of a strengthening jobs market and low commodity prices has helped put more money in consumers’ wallets and provided a boost to companies in the consumer discretionary sector.

Beyond broad economic factors, a sizable amount of the sector’s success this year can be traced to one company: Amazon. The online retailer is now the largest company in the sector (it accounts for more than 10% of the SPDR Consumer Discretionary ETF) and its stock has gained more than 110% this year. Though some of Amazon’s success has come at the expense of other retail companies, it’s likely that without Amazon’s surge the consumer discretionary sector’s 2015 performance would have been much closer to that of the overall stock market.

So how long will the dual trends of a growing economy and Amazon’s soaring stock price last? The jobs market could weaken slightly as the Federal Reserve starts raising interest rates, but as we’ve noted in the past the Fed is unlikely to raise rates very far or very fast. And amid a supply glut commodity prices don’t seem likely to rebound strongly in the near future, providing continued support for consumer spending. In other words, the economic environment could remain favorable for consumer stocks for a while.

Amazon’s stock, however, isn’t likely to continue giving the overall consumer discretionary sector a massive tailwind. The company has a 5-year average price-to-earnings ratio (a comparison of the company’s market value to its profits) of almost 175, a large number for any company but an astronomical one for a company with a market value of over $300 billion. Amazon will have to continue to grow extremely rapidly simply to justify its current stock price, so a repeat of its 2015 performance seems unlikely.