Consumer staples stocks assume market leadership

Yahoo Finance’s Emily McCormick joins the Live show to discuss the second-best performing sector in the S&P 500 for the year: consumer staples.

Video Transcript

BRIAN SOZZI: While tech stocks have been routed, there are a few areas seeing inflows of investor cash. One of those sectors is consumer staples. Yahoo Finance's Emily McCormick has more on this. Emily?

EMILY MCCORMICK: Well, Brian, investors are getting defensive, given all the uncertainties about the global and US economic backdrops. Now, that's helped boost the consumer staples stocks. And consumer staples is actually the second best performing sector in the S&P 500 for the year-to-date after energy. Now, it's up about 0.7% through Friday's close, which may not sound like a lot, but compared to the broader index decline of 13.3% year-to-date, staples are definitely a leader here in this market environment.

Now, this is a huge departure from what we've seen in recent years, when it was really tech, communication services, and information technology specifically that were the sectors leading the way higher. Now, just last year in 2021, the consumer staples sector was actually the second worst performing sector and was also in the bottom half of the worst performing sectors in 2020. So that really goes to show this aboutface that we've been seeing here in stock leadership.

But this year it really is back in the spotlight, seeing much more buying taking place. And if you look at the top 50 best performing S&P 500 companies year-to-date, yes, you will see a lot of energy companies. But you'll also see these consumer staples names, like Hershey, Kraft Heinz, and Kroger to name just a few.

Now, the quarterly results from many of the stocks in the consumer staples sector really highlights why many of these names have been so appealing. "The Wall Street Journal" was the first to really point this out earlier today. Companies like Coca-Cola, Procter & Gamble, Kimberly-Clark, all of these names that are classic consumer staples plays, handily exceeded expectations in their latest quarterly reports over the past couple of weeks. And these stocks are also outperforming against the S&P 500 year-to-date.

Now, of course, one of the big assumptions here is that these companies in the consumer staples sectors are going to have more durable demand in the case of a downturn. We hear talk of a recession really starting to escalate. And even in the case of the decades-high inflation we're seeing now, consumers may be cutting their discretionary spending on big-ticket items, but they're still going to be buying these household necessities.

So all of these factors have really helped buoy the sector specifically. And we'll see whether this leadership can really continue for the rest of the year. And, of course, just in May now, guys.

JULIE HYMAN: Yeah, it's interesting, I was looking at the month-to-date stat-- not month-to-date stats, because we just started the month, last month stats, Emily, for the various sectors. And definitely consumer staples were a stand up, but they did start to wane over the last couple of weeks. And something Sozz and I've been talking a lot about is how sustained the pricing power is going to be. I'm not sure if it was "The Wall Street Journal" or elsewhere over the weekend also had a story about how some consumers are maybe starting to balk because of inflation and maybe push back on some of the price increases. And you have to wonder if and when this is going to start to affect the staples companies.

EMILY MCCORMICK: I think that is one of the biggest questions here that Wall Street analysts have been thinking about, Julie. But at the same time, of course, inflation is something that has been hitting a variety of goods categories. It's something that we've been seeing across these retail sales reports, across these earnings reports. And, again, I think the thesis goes here that the first things that consumers are going to be cutting out are those discretionary items. They are potentially these larger purchase value items are going to be the first to get cut out of their budgets, as opposed to these consumer staples.

And the other thing will point out is that a number of analysts have been calling for the fact that we may be seeing the peak in inflation. Of course, with 8 and 1/2% of that CPI number, of course, PCE also coming in at decades highs, it is the question now of whether we start to see a little bit of a deceleration in these inflation rates and that that's something that's ultimately going to help boost these consumer staples companies first and foremost. And I'll point out here, Bank of America analyst Savita Subramanian actually was out with a note earlier today upgrading the consumer staples sector to overweight from underweight. And what she had to say was the sector is, quote, "near a record underweight by institutional investors. And lessening labor and input cost inflation could benefit margins."

Now, again, that does mean that we would have to see this peak actually get put in for inflation. We are still waiting to really see that in the economic data here, but potentially something that could continue to boost this sector, even given some of that weakness that you were pointing out at the tail end of April there, Julie.

BRIAN SOZZI: Real good stuff here. Emily McCormick, thanks so much.