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Big consumer bull turns cautious, prefers energy now

Nov. 16, 2015 11:17 AM ETXLE, IYE, XLY, RTH, OIH, VCR, VDE, PXJ, PMR, XRT, BGR, FIF, RSPD, RSPG, DUG, DIG, FXD, FXN, DDG, ERY, ERX, RETL, FDIS, FENYBy: Stephen Alpher, SA News Editor4 Comments
  • Bullish on consumer discretionary names (NYSEARCA:XLY) since the financial crisis, Thomas Lee downgrades the sector to Neutral while upgrading the beaten-down energy group (NYSEARCA:XLE) to Overweight.
  • At issue for consumer stocks is strengthening labor markets leading to higher wages, and thus driving margin compression. October's strong jobs report confirms what Lee has been hearing anecdotally - it's harder to find qualified applicants.
  • Rotating money into energy, Lee sees reflation, potential dollar declines, and accelerating U.S. investment spending. Lee takes note of the round-trip of energy vs. consumer discretionary. Starting the energy/consumer discretionary ratio at 1 in about 2004, it rose to above 4 prior to the global financial crisis, and has fallen all the way back to 1 today (chart here).
  • ETFs: XLE, VDE, ERX, XLY, OIH, ERY, DIG, XRT, VCR, DUG, BGR, IYE, FENY, RTH, RETL, FIF, PXJ, RYE, FXD, FDIS, FXN, RCD, PMR, DDG

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