The Consumer Staples sector has underperformed the S&P 500 in 2017. The Consumer Staples Sector SPDR ETF (XLP) has increased 10.2% YTD vs. the S&P 500 price return of 19.8%.
The sector's subpar performance is related in part to the continuation of the bull market, which is running into its ninth year, and investors' embrace of growth stocks.
The sector saw some notable buying interest in November, though, as tax reform optimism promoted a sector rotation trade into sectors that had been trailing the broader market and were seen offering good potential in 2018 for positive earnings surprises given the cut to the corporate tax rate.
Consumer Staples stocks typically exhibit relative strength in periods of slower economic growth, and/or stock market distress, as investors consider them relative safe havens due to their steady (and generally low) earnings growth rates and dependable cash-flow generation that afford the payment of secure dividends.
A look into 2018:
An accelerating economy is a positive for the consumer staples companies as it creates an opportunity to drive volume growth and possibly to restore some pricing power that should translate into better earnings growth potential. That doesn't mean, however, that it's the best thing for consumer staples stocks, which often lag the stocks of faster-growing companies during periods of economic, and stock market, strength.
The latter point notwithstanding, the sector could garner some favor in a continuing bull market since it holds potential for increased M&A activity as companies seek to increase economies of scale and grow market share in a very competitive arena that necessitates efficient operating models.
Separately, the sector will hold some defensive-oriented appeal in the event of a market correction and/or a slowdown in economic growth.
Key sector risks: Reduced pricing power; protectionist policies that curb sales potential of multinational corporations; a strengthening dollar; increased use of generic/private label products; Walmart and Amazon.com battling for market share in the grocery/consumer staples space