We have been bullish on consumer discretionary (cyclical) stocks for the better part of a year now. Back in November 2012 we wrote a KCS eNewsletter entry (scroll to section entitled “Hey American consumer, you can afford to live a little now”) discussing a few of the reasons we thought consumer discretionary would outperform other sectors.
From our November 16, 2012 newsletter:
“As an investor, I over-weight a sector that I believe will do particularly over the next year or two. Recently, I have started increasing the weighting of consumer discretionary stocks in client portfolios.”
We followed that up with a blog post that went into further detail about discretionary stocks and why we view Starbucks (NASDAQ: SBUX) as a good barometer for measuring American consumers’ willingness to make discretionary purchases. In March we followed up with another article entitled “Why we are even more bullish on consumer spending,” where we presented more evidence (data from the Federal Reserve) supporting our theory.
Our articles are meant to be informative and educational—we try to teach you something new or at least present an alternate point of view from what you hear and read in the media. We do not believe there is any educational value to our clients and loyal readers in frequently making bold predictions about the future, which is inherently unknown. However, in this case we formulated a hypothesis which we discussed in great detail over multiple articles, and now we are obligated to monitor its progress and be accountable for the results, good or bad.
How consumer discretionary stocks have held up against the competition
Let’s look at the relative performance of all 10 GICS sectors and real estate since November 16, 2012 using global sector ETFs. Note that we consider real estate to be its own sector; GICS categorizes real estate as a sub-sector of financials.
Over the past (almost) nine months, consumer discretionary is indeed the top global sector performer. It is possible that every argument we made to support our hypothesis has come to fruition and that is why CD has outperformed; it is also possible that none of our arguments were relevant and we were just incredibly lucky in timing our hypothesis.
We are writing this article to monitor the progress of our hypothesis, not to boast about its accuracy up to this point. In fact, we promise to follow up and reexamine it* at some point in late 2013. We also realize that the consumer discretionary sector could underperform in the near future, and in revisiting our hypothesis we may find the sector to be a relatively average performer over the time period since November 2012.
*If we demote the consumer discretionary sector from “over-weight” to “neutral” or “under-weight” in the near future we will announce this. And in that case we would evaluate the performance of the sector from November 16, 2012 through the time that we make that announcement (or through a date that we specify in that announcement). Basically—if we become less bullish on discretionary stocks we will make that clear; otherwise, we are happy to be on the hook for the sector’s performance over the near-term.