Investors Continue To Favor Cyclicals/Discretionary Over Staples

It has been another decent week in the markets, with most North American indices eking out weekly gains. The S&P 500 rose by 1.59%, and the Russell 2000 outperformed again, gaining 3.42%. However, global markets, such as mainland Chinese stocks, gave back 4.22% of their substantial gains from the past month. Meanwhile, the technology-heavy NASDAQ index increased slightly by 0.41% this week, even as Nvidia reached new highs once again. In Canada, the major index, the S&P/TSX Composite, rose by 1.39%. However, when we dig deeper, it’s evident that small and mid-cap stocks continue to lead the way: the smallest stocks gained 2.33%, mid-caps increased by 1.94%, while the 60 largest companies registered a gain of 1.25%. From a sector perspective, Financials were the big winners, with the SIA sector reading climbing by 4.02%, while Real Estate and Utilities rose by 3.15% and 3.75%, respectively. The big loser this week was Energy, which fell by 2.07%, while Materials, Health Care, and Staples had mild gains of just under 2%. With all this mixed data, it’s easy to get lost in the shuffle regarding where the markets might head next, especially against the backdrop of the upcoming election and a news cycle that seems manic at best. The natural instinct for advisors during this period of confusion is to hunker down and stay safe. Therefore, in today’s report, we will examine the relationship between consumer cyclical/discretionary stocks and the indexes and ETFs representing consumer staples. After such a market run-up and with many advisors concerned about high valuations, one would expect the market to seek safe havens. We know that sectors like Utilities and Financial Services have been red hot, contrasting with safer sectors like Health Care, which are underperforming. So, what gives?

Invesco S&P Consumer Staples Equal Weight ETF (RSPS) vs. Invesco S&P 500 Equal Weight ETF (RSP)

For this analysis, we turn to the SIA US Equity Specialty ETF Sector Report, which ranks 450 ETFs across various sectors of the economy at a granular level. The SIA AI platform conducts 2,025,000 calculations each day and arranges them into ranked order based on relative strength. To narrow down from 450 to a manageable number, we focused only on consumer and retail ETFs. The results are incredibly insightful, as they clearly show that Consumer Cyclicals and Discretionary stocks are leading the way in most cases, with monthly gains ranging between 5-10%.This trend indicates that money flows favor riskier, higher-octane names associated with discretionary spending, such as restaurants and hotels. Conversely, ETFs representing essential needs—like personal grooming, food, beverages, and tobacco—are clearly underperforming, with most ETFs in this space declining over the month and quarter, and producing lackluster year-to-date returns.At the bottom of this table, we find the Invesco S&P 500 Equal Weight Consumer Staples ETF with a -0.81% return for the month and a dismal 4.26% YTD figure. Even the restaurants ETF, ranked #95, had a 20.18% return, while ETFs for hotels, airlines, and cruises, ranked #182, yielded a 12.29% YTD return.We’ll conclude this analysis here for now, but one key takeaway is that the market currently maintains a risk-on bias. If you need to own a name in the Consumer Staples space, we will explore this in today’s Daily Stock Report, where we will look at Hanesbrands Inc., which sits at the top of the SIA Staples Report, as well as E.L.F. Beauty, which is at the bottom of the list. If you must invest in this sector, which is now fraught with risks, ensure you select companies with high relative strength. Otherwise, you might be carrying a live grenade.

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