Consumer Discretionary
“Confessions of a Shopaholic” with Isla Fisher 2009
I need it. No, I want it. No, I need it.
Need or Want?
Who doesn’t struggle with this question? Do I need this candle? The taco holders? The green scarf ?
It’s easy to flip the switch between Need and Want.
In stodgy old economic language, the “I want it” category is called the Consumer Discretionary sector.
This is a sector that needs a refresh. You will see why.
We expect companies within sectors to have similarities. Taking a close look at the sixty one companies that make up this sector it is hard to understand exactly what they have in common.
If you are buying individual stocks it would be quite easy to buy too much in the Consumer Discretionary sector because on the surface, it looks like they do not have very much in common
For example :
Amazon , McDonalds, Target, Home Depot and Ulta Beauty are all in the Consumer Discretionary sector.
So are:
Ford and GM, Carnival Cruise Lines, Tiffany, Nike, MGM resorts, Domino’s, and AutoZone.
How did these companies all end up in the same sector?
Here is the answer:
Theoretically (according to some economists), consumers spend money on what are called non- essential items after they spend money on the stuff they need.
Yes, the Consumer Discretionary sector is all about extra income you have lying around to spend on luxury items, like toilet paper and hand sanitizer.
This is the conversation I imagine between economists who have never wielded a vacuum cleaner:
“Let’s break down consumer spending by items that everyone needs and call them essential items.”
“After you spend on what you need, any money left over is used to buy what you want, and we will call those non-essential ( luxury) items.”
Letter to economists :
“Maybe it is time to rethink the whole essential versus non-essential thing. Time to start looking at the real world and what people really need to spend money on. Food and clothing, perhaps?”
How does it make sense that in The Year of the Pandemic, the “luxury” sector has returned in aggregate over 30%?
In a way I’m not surprised.
In the “old timey days” of economic theory buying a vacuum cleaner or a blender or an iron was considered a luxury purchase. Rather subjective thinking.
So naturally a company that sells luxury items would fall into the non-essential category. I wonder what category Swiffers are in?
This is where economic theory falls flat on its face. I’m not going to go down the whole “price elasticity” discussion upon which essential versus non-essential is based.
What can you buy on Amazon? Can you buy toilet paper? Would you call toilet paper a non-essential item?
I guess so because Amazon is classified in the Consumer Discretionary sector. The non-essential luxury sector.
Would you consider fresh food as non-essential? I have been to many Target stores, all with fresh food, yet Target is categorized in the Consumer Discretionary sector.
Are socks, household items like a lamp and hand sanitizer considered non-essential?
As of December 15th 2020, the Consumer Discretionary sector has returned 29.66%.
What this means is that on average and despite bankruptcies in retail, aggregate stock prices have gone UP in this sector. A 30% return is crazy.
Amazon stock is up 73.26%. Nice, right?
But a 300% return in less than 12 months is even crazier. That is the return on ETSY as of December 18th, 2020. On January 2, 2020, the stock was $45.19. On December 18th it was $190.76.
To my surprise, Tiffany’s stock price was down less than 2%. Impressive considering the beating cruise line and hotel stocks have suffered.
What choices did consumers have in 2020? Drive thru restaurants remained open when going to a grocery store was fraught with mask wearing and distancing.
Stuck at home with all those unfinished projects? Hello Home Depot and Lowes.
What other non-essential items can I buy from Amazon? Soap? Of course, click, click, click, along with all the other stuff Amazon recommends that I need. Including groceries!
Ordering Domino’s Pizza online for pick up is essential.
Investing is about diversifying risk by using different sectors of the market.
But I wonder how many investors will look back at 2020 and say, “ Of course I didn’t buy the Consumer Discretionary sector because, you know, it’s all luxury items.”
Not anymore.
Subcategories in the Consumer Discretionary sector :
- Apparel Retail
- Apparel, Accessories and Luxury Goods
- Auto Parts and Equipment
- Automobile Manufacturers
- Automotive Retail
- Casinos and Gaming
- Computer and Electronics Retail
- Consumer Electronics
- Distributors
- General Merchandise Stores
- Home Furnishings
- Home Improvement Retail
- Homebuilding
- Hotels, Resorts and Cruise Lines
- Household Appliances
- Housewares and Specialties
- Internet and Direct Marketing Retail
- Leisure Products
- Restaurants
- Specialty Stores
Resources used for this investment article:
S&P 500 Consumer Discretionary Sector Charts, Components, Prices – Barchart.com
This site lists every company in the Consumer Discretionary sector and the performance of each company to date in 2020.
Sectors & Industries Overview – U.S. Sectors- Fidelity
This site shows each sector of the economy and the performance of each sector.
How are companies categorized?
Frequently Asked Questions (FAQs) – NAICS – US Census Bureau
| 10. Who assigns NAICS codes to businesses and how? |
| There is no central government agency with the role of assigning, monitoring, or approving NAICS codes for establishments. Individual establishments are assigned NAICS codes by various agencies for various purposes using a variety of methods. The U.S. Census Bureau has no formal role as an arbitrator of NAICS classification.The U.S. Census Bureau assigns one NAICS code to each establishment based on its primary activity (generally the activity that generates the most revenue for the establishment) to collect, tabulate, analyze, and disseminate statistical data describing the economy of the United States. Generally, the U.S. Census Bureau’s NAICS classification codes are derived from information that the business establishment provided on surveys, census forms, or administrative records.Various other government agencies, trade associations, and regulation boards adopted the NAICS classification system to assign codes to their own lists of establishments for their own programmatic needs. If you question the NAICS code contained on a form received from an agency other than the U.S. Census Bureau, you should contact that agency directly. |
Table of Contents (spglobal.com)
GICS Methodology GICS Classification GICS classifies a company according to its principal business activity. To make this determination, S&P Dow Jones Indices and MSCI use revenue as the key measure identifying a company’s principal business activity. However, earnings and market perception are also recognized as important and relevant for classification purposes and are taken into account during the review process. A company is classified into the sub-industry whose definition most closely describes the business activities that generate the majority of the company’s revenues.
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