Consumer Staples Sector Survives October’s Sell-Off

According to market researchers, consumer staples was one of the only sectors to survive October’s vicious sell-off with a net positive gain.

Years ago, as a journalist for PBS’ “Nightly Business Report”, I realized that Wall Street isn’t really about money.

It’s about fashion.

While interviewing dozens of market strategists each year, I’d watch them spin stories that would make companies, sectors and whole markets go into — and then out of — favor.

I realized that quite often nothing really changed. A company that made ketchup or razor blades still made the same stuff this year that it did last year. The only thing that changed was whether the company was perceived as stale or exciting.

The sooner we understand that, the better we are at spotting bargains — and making money in the markets.

A good example is the consumer staples sector. These companies make consumer products we need (and use up) all the time like razor blades, toothpaste, soap and laundry detergent.

In less than a year they’ve already made part of the trip from “out of fashion” to very much “in style.”

A Rare Milestone for Consumer Staples

I told everyone to buy the consumer staples sector back in May when it hit what I called “a rare milestone” (more on that later).

And according to market researchers, it was one of the only sectors to survive October’s vicious sell-off with a net positive gain.

stock market sector growth chart

(Source: Mauldin Economics)

If you bought the Consumer Staples Select Sector SPDR ETF (NYSE: XLP) when I suggested it back in early May, you’d have a gain of more than 11% already in six months.

So, what was the “rare milestone”? The exchange-traded fund’s (ETF) dividend yield hit 3%.

Remember that dividend yields and stock prices go in opposite direction. The lower the ETF’s stock price, the bigger its dividend yield is for investors who buy at that price.

Likewise, I noticed that each time the ETF’s dividend yield hit 2.75% or higher, its stock price rose an average of 17% over the next four to five months.

Check out the chart below:

Consumer Staples Select Sector ETF Graph

If I put those circled yields in a table, this is how a stock purchase works out in the following months:

Consumer Staples Dividend Gains(Source: CapitalIQ)     

You Can Still Invest in Consumer Staples ETF

So let’s suppose you never bought the consumer staples ETF. Is it still worth buying now?

I say yes. I have several of these stocks in the Total Wealth Insider model portfolio.

And despite the gains since May, only a few of the companies in the sector, like Procter & Gamble and Philip Morris, have moved significantly higher.

Many investors are holding back as these companies face perceived short-term headwinds, like rising input costs and an uncertain trade situation. Yet the impact of both factors will fade in coming months.

As recent economic headlines attest, Americans’ wages are on the rise, so consumer staples companies have room to raise prices.

And the trade situation will get a lot of clarity as the midterm elections end and the Trump administration assesses what its trade and economic policies need to look like in order to win in 2020.

So in my view, the sector still has a long way to go.

I expect the consumer staples ETF to hit $65 by late next summer as investors recognize that the sector’s outlook is as good as ever — proving once again that Wall Street is a business based on fashion, not money.

Kind regards,

Jeff L. Yastine

Editor, Total Wealth Insider

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