By Indrani De; CFA, PRM; Mark Barnes, PhD; and Christine Haggerty, Global Investment Research
Consumer staples stocks have been the stalwart performers of US equities this year, as they play their traditional role of providing refuge in times of extreme market stress.
Large-cap US staples stocks are up 1.6% for the year through May. Along with the phenomenal gains in energy and the comparable resilience in utilities and materials, this buoyant performance helped blunt the impact of the brutal selloff in long-popular technology and consumer discretionary stocks (both down more than 20%), narrowing the Russell 1000 loss to 13.7% for the year to date.
Russell 1000 industry returns (TR %) – Year to date through May 31, 2022
Source: FTSE Russell. Based on Industry Classification Benchmark (ICB) data as of May 31, 2022.Past performance is no guarantee to future results. Please see the end for important disclosures.
The US economy is consumer-driven, but there are two starkly different types of consumer stocks: staples and discretionary. They have have starkly different fundamental characteristics, return and risk profiles and, thus, behave in distinctly different ways over economic and market cycles.
After badly lagging the Russell 1000 and their consumer-discretionary peers (anchored companies such as Amazon, Tesla and Home Depot) for most of last year’s reopening rally, US staples have strongly outperformed both indexes amid the intense risk-off gyrations this year. Despite losing some traction in May, staples stocks remained well ahead of both their sister consumer cohort and the broad-market index for the YTD and past 12 months.
Total returns (Rebased, TR %)
Source: FTSE Russell. Based on Industry Classification Benchmark (ICB) data through May 31, 2022. Past performance is no guarantee of future results. Please see the end for important legal disclosures.
Enduring household brands, stable growth
Given the current mid- to late-cycle economic backdrop, marked by high inflation, tightening financial conditions and still-healthy yet slowing job and spending growth, it is not hard to see why staples stocks have won favor this year.
This group encompasses large, mature companies that provide daily essentials such as food, beverages, personal care and tobacco, and includes household names like Procter & Gamble, Pepsico, Coca-Cola and Philip Morris International. Many have been around for a century or more and have generally thrived regardless of the state of the economy. Staples companies also tend to be generous and reliable dividend payers. All the firms mentioned above have beaten consensus earnings forecasts for the past couple of quarters, bolstered by product-price increases to stave off cost-inflation headwinds.
Solid defensive credentials
As such, staples stocks (unsurprisingly) boast strong defensive credentials. As shown below, they have been the least volatile of any industry group over the past five years – even less than defensive peers in telecom and utilities – and beta (at 0.6) has been half that of the discretionary group. Interestingly, despite its significantly lower volatility, staples have exhibited a far higher tracking error than the discretionary group, underscoring the former’s more benchmark-like behavior – and the latter’s strong countercyclical qualities.
Five-year annualized volatility, beta & tracking error – Russell 1000 & select Russell 1000 industries
Source: FTSE Russell. Based on Industry Classification Benchmark (ICB) data through May 31, 2022. Past performance is no guarantee of future results. Please see the end for important legal disclosures.
Based on five-year correlations, US large-cap staples have typically outperformed when technology and discretionary stocks have underperformed – and when other defensive stocks, notably those in telecom and utilities, have also done well.
Five-year excess return correlations – Russell 1000 Staples vs select industry peers
Source: FTSE Russell. Industry Classification Benchmark (ICB) data through May 31, 2022. Past performance is no guarantee of future results. Please see the end for important legal disclosures.
The chart below shows the four sectors within staples and how they have taken turns in driving industry gains over one-month, YTD and 12-month time frames. Notably, tobacco (the smallest staples weight, at 12.1%) provided ballast to overall industry returns in May, while beverages (27.5%) and food producers (21.8%) have been the industry leaders so far this year. Personal care (38.5% of the staples index) has suffered losses for all three periods.
Russell 1000 Staples returns by sector (TR %) – through May 31, 2022
Source: FTSE Russell. Industry Classification Benchmark (ICB) data through May 31, 2022. Past performance is no guarantee of future results. Please see the end for important legal disclosures.
A premium for stability
The US large-cap staples group has traded at a deep discount to the Russell 1000 for most of the pandemic years, as tech-heavy stocks and other beneficiaries of lockdowns and stay-at-home trends catapulted higher. But that valuation gap evaporated this year with the massive selloff in high-growth stocks and the normalizing in post-crisis earnings forecasts. At 18.5 times 12-month forward consensus EPS forecasts, staples now trades at a premium to the 17.9 multiple accorded the Russell 1000, more in keeping with pre-pandemic patterns.
Price/12-month forward EPS consensus forecasts
Source: FTSE Russell / Refinitiv. Industry Classification Benchmark data (ICB) through May 31, 2022. Past performance is no guarantee of future results. Please see the end for important legal disclosures.
Staples buoy US large vs small-cap outperformance
Staples have also played a big part in Russell 1000 outperformance versus its small-cap counterpart this year. As we noted in a previous blog post, investors have shown a clear bias toward the larger players across industries during the recent market turmoil. As our data show, tobacco, food products and beverage stocks were among the biggest positive contributors to Russell 1000 returns YTD, while their smaller-cap peers in those sectors were flat or detracted from those of the Russell 2000. This, coupled with outperformance in other defensive sectors within large-cap utilities and health care, helped offset far bigger losses in Russell 1000 tech software and hardware stocks (accounting for nearly half of the index’s 13.7% YTD decline).
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