How does the Consumer Discretionary Sector perform during and after recessions?
The Consumer Discretionary Sector is one sector many of us are familiar with — with some of us being a little too exposed. These industries have performed poorly in 2022 — but here’s some good news: the sector has a history of outperforming when coming out of past recessions.
In case you didn’t know
The Consumer Discretionary Sector includes companies in retail, travel, auto and others (i.e., non-essential goods and services) — like Amazon, Tesla, Home Depot, McDonald’s and Nike.
- The sector is more sensitive to economic changes — with non-essential goods often the first to be cut as spending slows.
- The sector has been hit especially hard by inflation, supply chain issues and changing consumer preferences.
This landed the S&P 500 Consumer Discretionary Sector as the third worst-performing sector of 2022. But the sector has been in similar positions before — leading the way down in the four recessions prior, including the 2008 financial crisis.
The sector doesn’t perform well with high inflation
Between 1973-1975 — the last period of high inflation — earnings of consumer discretionary companies saw a sharp drop in earnings.
- Company earnings (EBITDA) in the Consumer Discretionary Sector fell 71% — the most of any other major sector.
- The sector was also the worst-performing sector between ‘73-74.
Similar to today, consumers — worried they couldn’t afford basic necessities — pulled back on spending.
In the past, companies in the sector posted a sharp drop in earnings before the actual recession started. A recovering Consumer Discretionary Sector can signal a recovering economy during a recession.
While the sector isn’t giving us any recovery signals yet, investing in the sector near market bottoms has proven to be a strong bet in past downturns.
Investors: Leading the way
After the 2008 financial crisis, the Consumer Discretionary Sector **led the S&P 500 as the top-performing sector** between March 2009 and 2014.
Since July 1, near the start of the market’s bear rally, the Consumer Discretionary Sector led the way — up 13% since. Very few people believe we’re near the bottom of the market, but when we get there, we’ll be ready.
The ETF way: The Consumer Discretionary Select Sector SPDR Fund (NYSE:XLY) is one method for investors to get broad exposure to the industry.