’Tis the Season for Consumer Discretionary … or Not?

Here we are, deep into the all-important season for U.S. retailers, as year-end holiday sales will make or break the bottom line for many consumer-oriented companies—particularly many of those in the Consumer Discretionary sector. So it only makes sense that we review our current outlook on the sector this month. Spoiler alert! Based on the foundational building blocks that help inform our views on sectors, we’re maintaining a neutral rating.

In this article, we’re going to run you through the process by which we make our calls on the various sectors. We use an evidence-based, systematic process to identify factors that have historically provided insights into future performance. Because the economy and markets are constantly evolving, we overlay a heuristic element to account for the dynamic landscape.

Above is a quick summary of our Consumer Discretionary research before jumping into more detail below. With uncertainty surrounding the current economic outlook, it is hard for us to judge the macro economic landscape as anything but neutral. Amid the overconcentration of internet companies in the sector and a weakening sales outlook, we judge the fundamentals to be neutral for the Consumer Discretionary sector, as some of the core underpinnings of the fundamentals remain positive. The valuation factors are also neutral for the sector, as the average of multiple indicators rank Consumer Discretionary in the middle of the pack. In terms of behavioral factors, momentum is leaning negative for the sector, but strong upcoming seasonal influences bring our score up to neutral.

Behavioral score: Momentum negative, seasonal positive

While all eyes are on estimated sales throughout December, sector performance for the month is historically not impressive. After a typically strong November, when investors anticipate holiday sales, the sector historically posted positive relative performance in December 53% of the time, with average relative return of 0.07%. But the season doesn’t stop there, as things really heat up in the Consumer Discretionary sector in the first quarter, when earnings reports come in. That’s when the sector receives some seasonal tailwinds. Relative returns are typically positive, with average gains between 0.56% and 0.70% in January through March. Remember, these are relative to the returns of the S&P 500® Index, so these averages don’t imply that the absolute performance was up or down during the calendar months.

Historically, December is not the best month for Consumer Discretionary outperformance

Source: Schwab Center for Financial Research, Bloomberg, as of 11/29/2019. Data covers time period from January 1990 through November 2019.