Back in January, I started writing about consumer stock weakness. This was a notable change from prior bull market years (2009-2013) where the Consumer Discretionary Sector (XLY) had been leading the market higher. Following this weakness in January, we saw an 8% correction in the Russell 2000 (IWM) into early February.
The equity market would subsequently rally back to new highs in February but the consumer sector started showing weakness again in early March, calling into question the sustainability of the rally. Once again, weakness ensued, with the Russell 2000 selling off over 9% from its early March high.
As I wrote back in January and remains true today, one of the more troubling aspects of this weakness is that it continues to be broad based. Within the Consumer Discretionary sector, we are seeing underperformance this year in all of the discretionary Industry groups, including Autos, Retailers, Apparel Makers, Homebuilders, Hotels, Restaurants and Media stocks.
In total, 71% of stocks in the discretionary sector are down this year (median loss of -6.5%) versus only 45% of stocks showing declines the broader S&P 500 (median gain of +1.2%).
While much of this weakness in the sector has been blamed on bad weather, it is important to note that the weakness began in January before abnormal weather hit and has continued over the past month even as the weather has improved. It has also persisted in spite of better data in payrolls, consumer confidence, and retail sales, all of which are supposed to be favorable signs for the consumer.
Overall, it remains to be seen if this weakness persists but in the short-term it warrants a more cautious outlook as volatility is likely to remain elevated. Our ATAC models used for managing mutual funds and separate accounts are currently reflecting this view and are defensively positioned.
In the intermediate-term, we continue to expect this to be a more volatile year for equities and investors would be wise to study history when it comes to this important sector. In both 2000 and 2007, we saw significant weakness in the relative strength of the discretionary sector, which preceded major market tops (see chart below).
While it may not play out in the same fashion this year, it is at the very least something to monitor as we are now over five years into the bull market and the economic cycle will hit five years this June. As I wrote back in February, this is not 2009 anymore and investors need to understand the game they’re playing at this late stage in the cycle.
This writing is for informational purposes only and does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction, or as an offer to provide advisory or other services by Pension Partners, LLC in any jurisdiction in which such offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Pension Partners, LLC expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing.