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Investors are snapping up shares in US consumer staples stocks such as Coca-Cola and Colgate-Palmolive as they hunt for more defensive areas of the market amid concerns over a potential slowdown in the US economy.
The sector — which also includes other household names such as Kraft Heinz, Procter & Gamble and Walmart — has outperformed the blue-chip S&P 500 index in six of the past eight weeks, according to Bloomberg data.
Last week the S&P 500 consumer staples index notched up its best performance relative to the blue-chip index since March 2020, taking it to its highest ever level, although it has given back some ground in recent days.
The sector’s performance marks a broadening out of this year’s stock market rally from the megacap technology groups which have largely driven the gains. It comes as the first cracks begin to emerge in the US labour market, prompting disagreement about how aggressively the Federal Reserve should cut interest rates and concern that the world’s biggest economy could soon tip into a recession.
“A recession would clearly cause defensives to outpace,” said analyst Jim Paulsen, the former chief strategist at The Leuthold Group, adding that “strong economic growth would cause them to underperform”.
Coca-Cola is up around 20 per cent this year while Colgate has gained one-third. Over the past month, retailers Walmart and Target and consumer goods manufacturer Clorox have climbed 14.8 per cent, 9.1 per cent and 15.6 per cent respectively, well ahead of the S&P 500’s modest 4.5 per cent gain over the same period.
“Historically, defensives like consumer staples have done well in the lead up to the first Fed cut, which tends to come once there’s enough evidence the economy is slowing,” said Irene Tunkel, chief US equity strategist at BCA Research.
“If all of a sudden there’s data that dispels the idea we’re set for a hard landing — if market optimism were to return — then consumer staples will start to underperform,” she said.
Last week, Morgan Stanley added Walmart, Coca-Cola and Colgate to its list of stock tips, recommending that clients focus on “defensive businesses that prioritise operational efficiency or that have durable pricing power, or both”.
The sector has also benefited as investors have gradually moved out of racier parts of the market. Investor positioning is now “tilted towards” bond-like defensives including consumer staples, real estate and utilities, according to flows data collected by Deutsche Bank.
Concerns about slowing earnings growth for previously all-conquering tech stocks have simultaneously pushed investors to trim their holdings in artificial intelligence-adjacent market leaders, Deutsche’s data shows.
Consumer staples tend to lag the market during bull runs but catch up when growth begins to slow: the sector outperformed during the sell-off in 2022 but underperformed as the soft-landing narrative took hold in the second half of 2023.
In recent weeks, however, “there’s been a realisation on the part of investors that they threw the baby out with bathwater with defensives last year,” said Kevin Gordon, a senior investment strategist at Charles Schwab.
“The fact consumer staples were down during the first year of this bull market is consistent with this recent action being a broadening out of the rally,” he added.