Will the Energy Exodus Fuel a Consumer Stock Frenzy?

So far this quarter, Energy stocks in the S&P 500 have fallen almost 24% while Consumer Discretionary stocks have increased by over 8%.  While the move has not been dramatic, it is worth considering the potential for a further move. 

Since the S&P 500 GICS data has been posted to the Standard & Poors website (12/31/00), Energy has typically been much smaller than Consumer Discretionary in terms of its contribution to the index.  If investors want to buy Consumer stocks to play a rebound, there is somewhat of a scarcity of stock.  In the two charts below, you can see both the actual percentages of the S&P 500 as well as the ratio of the market caps of Consumer Discretionary stocks to Energy stocks. 

Click to enlarge

 

Click to enlarge

Summarizing the data, Energy's representation moved from 6% to 16% at the most recent quarter-end and has pulled back to 12%.  Consumer Discretionary has typically averaged about 12% but recently bottomed at 8% of the S&P 500.  Since the end of the last bear market in 2002, Consumer Discretionary has moved from 2.2X the weight of Energy to about 0.75X after bottoming at just 0.5X.

I already have large exposure to Consumer Discretionary (and none to Energy, though I look to change that soon) - you can review my holdings.  I have written about many of these names in the past few months - click on my author's page to link to those articles.  My Top 20 Model Portfolio has 20% or so exposure to Consumer Discretionary, which is one of the major reasons it has outperformed the S&P 500 since the late May launch. 

While the size of the Consumer Discretionary sector is just 8+% of the S&P 500, it does make up a larger proportion of the S&P 400 Mid-Cap and the S&P 600 Small-Cap indices.  Still, if a large amount of dollars needs to shift into Consumer Discretionary, the investable universe will be a limiting factor.  With falling energy prices, the passage of time, cheap valuations and muted expectations, the Consumer Discretionary sector could provide some continued leadership.

Disclosure: Author holds stocks in the consumer discretionary sector. Please click here to review holdings.

Comments

[John C. Lee:]

Why no mention of consumer staples? They're obviously outperforming the discretionaries in the environment we're in.

2008 Sep 11 04:58 AM

[Alan Brochs...:]

Weekly TA, you raise a good point. Actually, though, Consumer Discretionary has kept pace this quarter with Consumer Staples, trailing the return by just 0.4% in the S&P 500 and beating in Mid-Cap and trailing in Small-Cap by small magnitudes.

I considered combining the two. Certainly I am not suggesting that all reallocation favors solely Consumer Discretionary. From an economic perspective, there is a very direct correlation: "Discretionary" spending has been shifted from consumption of other goods and services to energy costs. From a stock view, Consumer Discretionary stocks have been hammered, while Staples have actually outperformed stocks generally as their earnings have been hurt less and as investors have sought them for their defensive qualities. I have the data, and Staples tends to get bigger when the market is going down and smaller as it goes up (i.e. it has a lower beta). Going back to the bottom of the bear market in 2002 roughly, Staples was at 13.4% of the S&P 500 compared to just 8.1% two years earlier. At year-end 2004, 2005, 2006 and 2007, it was roughly 10.5%. Today it is 12.1%, a rather high number already.

2008 Sep 11 06:47 AM

[NOWHEREMAN:]

Given the following Hypothesis, Dow below 9,000 and S&P at 900, will my investing in either consumer discretionary or staples guarantee a positive return?

2008 Sep 11 09:07 AM

[inthemoney:]

I see short energy / long consumer discretionary trade going for a while now, about a month or so. Like with everything these days, traders push is far beyond the point where it make sense. It stopped making sense to me about 2 weeks ago, but it still keeps going. Expect a violent snap back when it stops working.
I give you one example, - I am short RSH, shorted in $19.5 area. It is up from $13 to $20 since July lows, that is 80%, it makes no sense, nobody goes to Rdio Shack stores, it is one of worst companies out there. Who is buying it? I tell you who, - computers.

2008 Sep 11 11:07 AM