Consumer discretionary at the bottom, minus 2.3 percent in a record year

The short version

• Consumer discretionary is down 2.3 percent and is the weakest of the eleven sectors in the S&P 500.
• Eight sectors stand higher than at the start of the year, the energy sector leads with around 43 percent.
• The number of new hires fell by 278,000 in July, and retail sales fell against expectations.

One sector against the trend

In a year in which the large American indices are heading for their fourth winning year in a row, there is one striking exception. Consumer discretionary is down 2.3 percent and is therefore the weakest of the eleven sectors in the S&P 500. Eight sectors stand higher than at the start of the year.

The distance to the top is considerable. The energy sector leads with around 43 percent. Between the best and the weakest sector there is therefore a very wide gap within a single year.

What is notable is not the size of the minus but its loneliness. Eight of eleven sectors stand higher than at the start of the year, and the large indices are heading for their fourth winning year in a row. In such an environment a negative sector is a piece of information in itself.

The explanation lies in the household budget.

What consumer discretionary means

This order is the heart of the matter. A household cannot postpone its rent and cannot cancel its electricity contract. A new jacket, a piece of furniture or a trip can be put off without anything changing in daily life straight away.

That is why a worsening household situation does not affect the economy evenly. It hits first and hardest the part that is cut first.

The same holds in reverse. When households have room again, the postponed purchases come back, and the same sector recovers faster than others. Exactly this mobility makes it the most sensitive indicator of the situation of private households.

What the data show

The data fit this. Retail sales fell in July against expectations, consumer confidence weakened more than expected, and the number of new hires fell by 278,000.

This becomes visible in individual shares. Nike marked a twelve year low, and travel and leisure shares such as Wynn Resorts, Las Vegas Sands and Carnival reached new one year lows.

Clothing, gambling, travel and cruises stand for the same kind of spending. These are purchases a household makes of its own accord and can just as freely leave undone.

The three data points named interlock. Fewer new hires mean fewer new incomes, weaker consumer confidence means more caution with existing ones, and falling retail sales are the result of both. The sector shortfall is therefore not an isolated stock market event but the translation of these figures into expectations.

This qualification belongs with every sector report. A minus of 2.3 percent is not a finding about every single company in the industry but about the weighted result of the group.

Assessment

A sector in the red in an otherwise strong year says more than the index level itself.

Consumption is the place where an economy first feels that money is getting tighter. When households save on clothing, travel and entertainment while they still have to pay for energy and rent, it shows up in exactly this sector.

For judging the American economy I therefore consider this figure more important than any index report. Private consumption carries the larger part of economic output there.

Frequently asked questions

What distinguishes consumer discretionary from consumer staples

Consumer discretionary covers spending that households can postpone, for example on clothing, furniture, travel, entertainment or a new car. Consumer staples covers food, drinks and hygiene articles. If the costs for energy and housing rise, households save on discretionary spending first, because going without hurts least there.

Does minus 2.3 percent mean that all consumer companies are losing

No. A sector figure is an average. The minus means that the losses of individual heavyweights outweigh the gains of others. Because such indices are weighted by market value, a few large companies determine the result.

Which shares stand behind the shortfall

Named are Nike with a twelve year low as well as travel and leisure shares such as Wynn Resorts, Las Vegas Sands and Carnival, which reached new one year lows. That fits with retail sales falling in July, weaker consumer confidence and the drop in new hires by 278,000.

This text is not investment advice. It reports verifiable figures and puts them in context.

This analysis is for information only and is not investment advice.