Stocks in 2012: Look to the Consumer

Posted by cskadmin on March 16, 2012

Better-than-expected economic reports, actions by the European Central Bank, and easier monetary policy in certain corners of the globe have combined to fuel recent stock market gains.

Following a lackluster year-end performance in 2011, U.S. stocks, as measured by the S&P 500, advanced 8% between December 31, 2011, and February 23, 2012.1 Although an early year surge is no guarantee that stocks will continue to advance for the remainder of 2012, investors appear willing to take more risk. What is fueling this change in attitude? Some market observers believe that better-than-expected U.S. economic reports, efforts by the European Central Bank to address the continent’s sovereign and banking issues, and easier monetary policy in China and India have combined to ease investor concerns about stocks.2

Looking to the Consumer

Although consumers are not expected to go overboard in spending this year, the pervasive gloom that dominated Americans’ thinking several years ago appears to have lessened. Currently, S&P Capital IQ recommends that stock investors overweight both the Consumer Discretionary and Consumer Staples sectors. 3 S&P Economics believes that U.S. gross domestic product, a measure of economic growth, will increase 2.1% this year, and consumer spending will increase 2.0%.

Consumer Discretionary, as the name suggests, consists of services that consumers enjoy but could live without. Examples include Cable and Satellite Television, Restaurants, and Movies/Entertainment. S&P Capital IQ anticipates that drivers of this sector will include a gradually improving U.S. economy, technology advances, continued expansion in emerging markets, and growth in digital media technology. Technology advances are making it possible for Consumer Discretionary companies to target consumers carefully, potentially increasing return on investment, especially when analyzing digital buying patterns.

An Ongoing Need

Even when economic times are uncertain, most consumers shop for staples that they useregularly. Examples of subsectors within the Consumer Staples sector include Soft Drinks, Packaged Foods/Meats, and Household Products. S&P Capital IQ believes that volume gains for Consumer Staples stocks are likely to be fueled by higher marketing expenses and robust sales in developing markets. In the minds of certain investors, Consumer Staples is considered a defensive sector that may be appropriate when the households are reluctant to purchase bigticket items. This mindset may drive sales growth in private label goods and inhibit sales of more expensive branded items.

When crafting your portfolio, it is important to remember that investment in specialized industry sectors have additional risks when compared with a more diversified portfolio. Consider diversifying in an attempt to cushion yourself against market swings in one area.4 Your risk tolerance and time horizon are factors to review when deciding the proportion of your portfolio to invest in stocks and other investments.

Source/Disclaimer:
1 Source: Standard & Poor’s. Past performance does not guarantee future results. You cannot invest directly in an index. Investing in stocks involves risks, including loss of principal.

2 Source: S&P Capital IQ U.S. Sector Outlook, “Dead Money,” February 23, 2012.

3 Sector funds may be more volatile than funds that diversify across many industries or sectors.

4 There is no guarantee that a diversified portfolio will enhance overall returns or outperform a nondiversified portfolio. Diversification does not ensure against market risk.

Required Attribution

Because of the possibility of human or mechanical error by McGraw-Hill Financial Communications or its sources, neither McGraw-Hill Financial Communications nor its sources guarantees the accuracy, adequacy, completeness or availability of any information and is not responsible for any errors or omissions or for the results obtained from the use of such information. In no event shall McGraw-Hill Financial Communications be liable for any indirect, special or consequential damages in connection with subscriber’s or others’ use of the content.

 

© 2012 McGraw-Hill Financial Communications. All rights reserved.

March 2012 — This column is provided through the Financial Planning Association, the membership organization for the financial planning community, and is brought to you by Capital Strategies, Inc. , a local member of FPA.