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Consumer discretionary: Fueled by surprising consumer strength

Key takeaways

  • US consumers remained surprisingly strong in 2023, which helped boost the relative performance of the consumer discretionary sector.
  • For 2024, the sector may continue to be driven by macro considerations—such as the health of the economy and the direction of interest rates.
  • Certain retailers have been attractively positioned with reasonable valuations and defensive business models that could help insulate them against potential economic weakening.

There’s an old investing yarn that says, “Don’t bet against the American consumer.”

The past year certainly highlighted the threads of truth in that yarn, as consumers proved astonishingly resilient in the face of high inflation, rising interest rates, and increased recession risk. This resilience helped support the stocks of the consumer discretionary sector, which encompasses companies that sell nonessential goods and services like clothes, new cars, and hotel stays.

In 2024, these stocks are likely to continue to rise or fall with the fate of US consumers. Because these companies sell nonessential goods and services, they’re often among the first types of expenses consumers cut back on in a downturn. Yet no matter what lies ahead, I believe the sector can continue to offer pockets of attractively valued stocks, making for some potentially compelling investment opportunities.

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Coming off a strong year

Despite the myriad economic challenges, consumer health remained relatively resilient in 2023. Unemployment stayed low. And “real wage growth,” meaning wages after accounting for the impacts of inflation, finally turned positive—thanks to the upward wage pressures of a tight labor market and a declining inflation rate. This helped consumer spending increase over the year, including in the most recent quarter, although it was at a slower pace than the previous year.

In addition to benefitting from a strong consumer, the stocks also benefitted from the same macro themes that helped drive the broad stock market higher in 2023—including relief as the end of the Fed’s rate-hiking cycle seemed to come into view as the year progressed. Sector-level performance was also boosted by unique issues impacting some of the largest companies in the sector. The 2 largest constituents in the sector, by a wide margin, are Amazon () and Tesla (), both of which have experienced extremely strong gains in the past year as mega-cap, tech-related stocks have surged. Both companies have also been seen as potential investing plays on artificial intelligence.

Chart shows year-to-date price performance of the consumer discretionary sector versus that of the S&P 500. As of December 8, 2023, the consumer discretionary sector had gained 33.86% compared to the 19.92% gain for the S&P.
Past performance is no guarantee of future results. Consumer discretionary sector performance is represented by the S&P Consumer Discretionary Select Sector Index. Data as of December 8, 2023. Source: S&P Dow Jones Indices, a division of S&P Global.

Other segments of the sector also benefited from unique dynamics. For instance, the post-pandemic recovery in travel continued at a strong clip, supporting the stocks of hotels, resorts, online travel platforms, and cruise lines. Meanwhile, homebuilders were helped by constrained inventories, as many existing homeowners decided to stay put due to high home prices and mortgage rates. This effectively redirected buying activity toward new homes, where inventory was available.

Driven by the winds of the economy

In 2024, I believe sector-level performance will likely continue to be driven by macroeconomic crosscurrents. Lower inflation and a pause or end to the Fed's rate-hike cycle could benefit the sector, as consumers might be more likely to purchase big-ticket items such as automobiles or houses. Better still for the sector could be a scenario in which the economy sidesteps a recession and the labor markets remain strong.

If the US does enter a recession and consumers pull back their spending, consumer discretionary stocks could face considerable pressure. The resumption of student loan payments in October, after a long pandemic-related pause, could place added pressure on some consumers.

Potential value in retailers

After the sector’s breakout performance in 2023, stock valuations aren’t as cheap as they were a year ago. But there are still areas of the market where I have found strong long-term drivers, and where stocks have traded at compelling prices. One particular continued area of opportunity has been select retailers. Some of these companies have defensive aspects to their business models, which could provide a degree of insulation if the economic outlook worsens.

Fund top holdings1

Top-10 holdings of the Fidelity® Select Consumer Discretionary Portfolio () as of October 31, 2023:

  • 25.6% – Inc. ()
  • 12.1% – Tesla Inc. ()
  • 4.6% – Home Depot Inc. ()
  • 4.4% – Lowe’s Companies Inc. ()
  • 4.3% – TJX Companies Inc. ()
  • 3.3% – Nike Inc. ()
  • 2.9% – Hilton Worldwide Holdings Inc. ()
  • 2.8% – McDonald’s Corp. ()
  • 2.3% – Aptiv PLC ()
  • 2.3% – Booking Holdings Inc. ()

(See the most recent fund information.)

For instance, DICK’s Sporting Goods ()2 is a leading specialty retailer of sporting goods and active apparel. The company’s investments in in-store experiences have made it a destination for consumers, and this has afforded it a special status among vendors and brands—at times giving it unique access to a range of products that other stores may not carry. The stock has performed well over the past several years (though past performance is never a guarantee of future results). Yet despite that performance, I believe the stock has still been undervalued—including on price-earnings ratios (P/Es) using past actual earnings and P/Es based on analyst estimates of future earnings.

The TJX Companies (), whose businesses include TJ Maxx, Marshalls, and HomeGoods, has felt the pressure of macro headwinds. But the company’s unique operating model could provide strong positioning if the economic outlook worsens. TJX buys up excess inventory from name brands to sell at its low-cost stores. Because low price points are already built into the company’s business model, it may have a degree of insulation against further economic slowing (which can lead consumers to trade down, from higher-priced stores to lower-priced stores).

A long-term focus

To be sure, as we look to 2024 there are reasons for near-term caution on the economic and consumer backdrop. However, as a sector portfolio manager my focus remains on the longer term. Fortunately, consumer discretionary is a wide and diverse sector that can offer pockets of attractively valued stocks. Fidelity's research insights can help me uncover those companies with strong risk-reward profiles and long-term growth potential.

Jordan Michaels

Jordan Michaels is a research analyst and portfolio manager in the Equity division at Fidelity Investments.

In this role, Mr. Michaels manages Fidelity Select Consumer Discretionary Portfolio, Fidelity Advisor Consumer Discretionary Fund, Fidelity VIP Consumer Discretionary, Fidelity Select Construction and Housing Portfolio, the consumer discretionary sleeve of Fidelity and Fidelity Advisor Stock Selector Large Cap Value Funds, and covers specialty retail.

Prior to joining Fidelity in 2008, Mr. Michaels was an intern at GID Securities. He has been in the financial industry since 2006.

Mr. Michaels earned his bachelor of arts in economics from Brandeis University. He is also a CFA® charterholder.

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Before investing, consider the funds' investment objectives, risks, charges, and expenses. Contact Fidelity for a prospectus or, if available, a summary prospectus containing this information. Read it carefully. 1. Any holdings, asset allocation, diversification breakdowns or other composition data shown are as of the date indicated and are subject to change at any time. They may not be representative of the fund's current or future investments. The Top Ten holdings do not include money market instruments or futures contracts, if any. Depository receipts are normally combined with the underlying security. Some breakdowns may be intentionally limited to a particular asset class or other subset of the fund's entire portfolio, particularly in multi-asset class funds where the attributes of the equity and fixed income portions are different. Under the asset allocation section, international (or foreign) assets may be reported differently depending on how an investment option reports its holdings. Some do not report international (or foreign) holdings here, but instead report them in a "Regional Diversification" section. Some report them in this section in addition to the equity, bond and other allocation shown. Others report international (or foreign) holding as a subset of the equity and bond allocations shown. If the allocation without the foreign component equals (or rounds to) 100%, then international (or foreign) is a subset of the equity and bond percentage shown. 2. Fidelity® Select Consumer Discretionary Portfolio (FSCPX) held a position of 2.22% in this stock as of October 31, 2023.

Views expressed are as of the date indicated, based on the information available at that time, and may change based on market or other conditions. Unless otherwise noted, the opinions provided are those of the speaker or author and not necessarily those of Fidelity Investments or its affiliates. Fidelity does not assume any duty to update any of the information.

References to specific securities or investment themes are for illustrative purposes only and should not be construed as recommendations or investment advice. This information must not be relied upon in making any investment decision. Fidelity cannot be held responsible for any type of loss incurred by applying any of the information presented. These views must not be relied upon as an indication of trading intent of any Fidelity fund or Fidelity advisor. Investment decisions should be based on an individual's own goals, time horizon, and tolerance for risk. This piece may contain assumptions that are "forward-looking statements," which are based on certain assumptions of future events. Actual events are difficult to predict and may differ from those assumed. There can be no assurance that forward-looking statements will materialize or that actual returns or results will not be materially different from those described here.

Past performance is no guarantee of future results.

Investing involves risk, including risk of loss.

Stock markets are volatile and can fluctuate significantly in response to company, industry, political, regulatory, market, or economic developments. Investing in stock involves risks, including the loss of principal.

Because of its narrow focus, sector investing tends to be more volatile than investments that diversify across many sectors and companies. Sector investing is also subject to the additional risks associated with its particular industry.

The consumer discretionary industries can be significantly affected by the performance of the overall economy, interest rates, competition, consumer confidence and spending, and changes in demographics and consumer tastes.

The S&P 500® Index is a market capitalization-weighted index of 500 common stocks chosen for market size, liquidity, and industry group representation to represent US equity performance. The S&P Consumer Discretionary Select Sector index comprises those companies included in the S&P 500 that are classified as members of the consumer discretionary sector, with capping applied to ensure diversification among companies within the index.

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