Consumer Discretionary Sector Definition

Consumer discretionary stock prices tend to rise and fall with the overall economy, making them cyclical stocks. The COVID-19 pandemic created unprecedented challenges for many consumer discretionary companies. But, as the economy reopens, investors have a unique opportunity in the sector.

Make sure you check out an ETF’s holdings and expense ratio — the percentage fee the fund charges each year — before investing. We believe everyone should be able to make financial decisions with confidence. Off-price retail giant TJX Companies has found success in apparel and home goods with a business model that’s not easily replicated online. At the same time, the restaurant chain still has an emphasis on value that keeps customers coming back for more, plus its drive-thrus helped it weather the pandemic better than many others.

What Is Consumer Discretionary? Definition in Economic Indicators

The discretionary category can include cars, luxury goods, clothing, sports equipment, movies, furniture, and services such as hotels, restaurants, TV or any other leisure. You can buy the stocks of companies found in the various industries within the consumer discretionary sector. For convenience and diversification purposes, you can buy a mutual fund that invests in them, such as the Vanguard Consumer Discretionary Index Fund Admiral Shares. Additionally, you can purchase an exchange-traded fund that follows the sector, such as the Consumer Discretionary Select Sector SPDR® Fund. The term describes products and services that are desirable for consumers, but not essential to their daily living. In other words, rather than having to buy these products because they are necessities, they have the freedom to decide—the discretion—to purchase them, or not.

• Ralph Lauren (RL), Signet Jewelers (SIG), and Restoration Hardware (RH) are some examples.
• Examples of restaurant, hotel, and leisure companies include McDonald’s Corporation (MCD) and Carnival Corporation (CCL), a cruise vacation company.
• The automobile industry designs, produces, and markets cars, trucks, buses, and other types of vehicles.
• So as consumers open their wallets, many retail investors start buying the public companies that could benefit the most.

Many investors like to put their money into sector exchange-traded funds (ETFs) to navigate through different types of economic cycles. ETFs can limit risks with broadened diversification, while allowing for the concentration of investment positions. The consumer confidence indicator can shed light on future consumption and saving behaviors of households. This insight is tied to answers households provide when surveyed about their expected financial circumstances. It’s also based on how they feel about economic conditions and unemployment. These consumers, however, still need to buy consumer staples—such essential and basic household items as toilet paper, paper towels, food, beverages, and gas.

Consumers will only buy non-essential items when they have enough income left at the end of each month to afford those products. While consumers might want new clothes or durable goods, they will avoid buying them if they are unable to financially. These type of products and services are called consumer cyclicals or consumer discretionaries. Discretionary products are any goods that are not necessary and thus not required to enjoy basic living conditions. In contrast, those products that are necessities of life such as food, drugs, medical supplies, hygiene or personal care products, often classified as consumer staple.

Consumer discretionary vs. consumer staples: How they differ

There are several economic indicators that help economists to determine the state of an economy. These indicators are also important for predicting trends for the consumer discretionary and consumer staples sectors. Consumer discretionary companies are companies that sell non-essential products and services such as entertainment or premium priced products. Of course, both options come with a fee, but it’s often minimal compared to the work involved. And the key is that investors remain diversified, potentially mitigating the volatility that comes with owning individual stocks. Plus, as economic factors change, such as a sudden spike in unemployment, active fund managers can tilt their holdings to take advantage of buy and sell opportunities.

When it comes to shopping, there are things that you need and things that are just nice to have. It includes goods and services that people spend money on when they have a little extra cash available, such as travel, going out to restaurants, or fashion and jewelry. In comparison, consumer discretionaries can be removed from your budget during a recession. As soon as the economy begins contracting, investors will often sell their consumer discretionaries and buy consumer staples stocks. They may also buy low-risk investments, like United States Treasuries and corporate bonds. Once the economy improves, investors will normally start buying consumer discretionaries again.

Consumer Staples

More recently, rising interest rates have the potential to cool economic growth, presenting a challenge for consumer discretionary companies in today’s stock market. Unlike consumer staples companies, which make necessities, consumer discretionary stocks tend to do well when the economy is strong and poorly when times are tough. Keep reading to learn about the consumer discretionary sector and some top stocks to consider. Household goods, food items, hygiene products, alcohol, tobacco and beverages are all examples of consumer staples. Because these items are considered essential, they are impervious to economic fluctuations.

Considering the purchase of a consumer discretionary good depends upon an individual financial condition and the economic landscape. In weak economies, some companies that produce goods for basic living or consumer staple tend to outperform those that produce consumer discretionary products. On more developed economies, consumer discretionary products will usually get a bigger portion of the household budget, as primary needs can be fulfilled easily and cheaply. The demand for consumer discretionary goods is typically much more elastic in comparison to consumer staples goods.

Consumer Discretionaries vs. Consumer Staples

While hospitality is a popular sector, you can also buy restaurant, automobile and clothing stocks. As long as the economy is advancing, these stocks will generally perform well. Because of this, investors often buy these stocks when they expect an economic expansion. If they think the economy consumer discretionary meaning is about to undergo a contraction, they will sell their consumer discretionaries. Investors can look at the overall economy to determine whether they want to invest in consumer discretionaries or not. They can also use consumer discretionaries to understand how the economy is doing.

Many companies within the industry do not own their real estate properties, but they act as operating companies and sign lease agreements. Also, many hotels and restaurants pursue franchise business models rather than owning and operating restaurants themselves. The offers that appear on this site are from companies that compensate us. But this compensation does not influence the information we publish, or the reviews that you see on this site. We do not include the universe of companies or financial offers that may be available to you.

Companies within the industry typically import or buy goods from manufacturers and then resell them through their own networks of dealers and distributors. However, certain distributing companies may have their own manufacturing facilities. Other industries within the consumer discretionary sector are household goods, leisure products, and multiline retail.

• But this compensation does not influence the information we publish, or the reviews that you see on this site.
• Researching an ETF is often easier than researching individual stocks, but it’s still worth doing, since ETFs are not without risk.
• The company has increased year-to-date profits at a time when many of its peers are struggling with bloated inventory levels.
• Alternatively, investors hedge their bets and look for exchange-traded funds or ETFs.
• This is because they do not have enough disposable income to afford these products.

In a passively managed ETF, a fund manager buys a basket of consumer discretionary companies with a broad index. Alternatively, fund managers can buy or sell stocks in a sector at their discretion with actively managed funds. ETFs provide a low-cost option for investors to diversify and access a wide range of investment themes, including consumer discretionary stocks. Through ETFs, investors leave the responsibility of choosing stocks to a professional asset manager. There are multiple industries under the consumer discretionary sector. These industries are essential for investors because they paint a picture of consumer spending.

Both product classifications are influenced by cycles of the economy. For our 12 Best Consumer Discretionary Stocks to Buy list, we chose 12 leading consumer discretionary stocks that had competitive advantages and strong businesses. The fund has about $19 billion in assets under management and an expense ratio of 0.10 percent.

You can see the company’s success in its comparable-store sales, which have a history of steadily growing. Although those sales numbers fell sharply during the pandemic, Starbucks is rebounding in the U.S. However, it’s facing similar challenges to Nike in China as its zero-Covid policy has cooled off sales there. Nike has built a strong digital ecosystem around apps such as SNKRS and the Nike Training Club, which has buffered much of the impact. Even though revenue growth has been sluggish during the pandemic, the company has delivered solid profits and has outperformed rivals such as Adidas and Under Armour (UAA 0.13%)(UA 0.57%). Her topics of expertise include futures and options trading strategies, stock analysis, and personal finance.