The S&P 500 closed at a record high on Friday, but only two of its eleven underlying sectors could say the same. The first was technology, which as we noted last month, has been showing consistent relative strength since May and was boosted by a more than 10% gain from Apple for the week. However, the other sector to do so may surprise people: consumer staples.
We haven’t talked much about consumer staples recently, because as one would expect in a strong bull market, they have consistently lagged the broad market. Since the S&P 500 bottomed in March 2020, staples have underperformed the S&P 500 by more than 30% and the sector’s 14.9% year-to-date return is just over half that of the broader benchmark.
Why is that? Well consumer staples consist of some of the most steady and reliable companies on the planet, and are a classic defensive sector. No matter the economic environment, people still need to buy their core essentials, whether that is food, beverages, alcohol, tobacco, or household items like paper towels and detergent. Sectors like this have historically outperformed during recessionary or risk-off environments, but the price for that is usually underperformance in strong bull markets like we have seen over the past year and a half. That dynamic is what has actually got our attention, because as shown in the LPL Chart of the Day, not only have consumer staples broken out in absolute terms, but relative to the S&P 500 they have recently broken a downtrend that stretches back to this year’s first quarter.
“The S&P 500 has rallied back to its highs,” said LPL Financial Technical Market Strategist Scott Brown. “But since Thanksgiving the top performing sectors are technology, utilities, consumer staples, and healthcare, while many cyclical sectors are still down. Though we remain positive on stocks over the intermediate-term, the recent action makes us skeptical of the rally so far in December.”
To be clear, we still believe the economic environment shapes up favorably for stocks in 2022. And the recent flight to safety may just be investors adding some protection ahead of Wednesday’s much-anticipated Federal Reserve (Fed) meeting where the Fed is expected to speed up the pace of its bond buying program, and possibly offer clues into future rate hikes. But regardless of what the Fed says, more relative strength from defensive sectors is not something that equity bulls want to see over the next few weeks.
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