Consumer Discretionary

This year we’ve written several notes surrounding the Consumer Discretionary sector’s prominence among our top Group Selection (GS) Scores. This pattern persisted for a fifth consecutive month in April.

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While our Group Selection (GS) framework hasn’t yet warmed up to commodity-oriented industries, our macro work suggests perhaps it should.

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Of the 110 industries in our framework, the top seven are all Consumer Discretionary.

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The Amazon Effect masks both the underperformance of the average Discretionary stock and the relative value that’s been reestablished across the sector. “Discretionary ex-Amazon” is a better contrarian pick than Energy.

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Shifting consumer preferences and the relentless rise of e-commerce are changing the sector’s beneficiaries of the healthy backdrop away from retail, yet other Discretionary opportunities abound outside of the traditional retail groups.

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Sector swings have been wild enough thus far in 2016 that Consumer Discretionary’s relative weakness has drawn little commentary.

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Health Care, Consumer Discretionary, and Financials are the top three rated broad sectors.

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While we view the industry group selection as the most important decision, looking at the sector level rankings also helps us identify broad trends. Here we highlight the top two rated sectors, currently, which also represent a combined >40% weight in our Select Industries Portfolio.

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Despite this sector’s extended outperformance, we think this trend may persist in the near term as Discretionary industry groups look increasingly attractive within our group work. Keeping an eye on the Fed Funds rate is key, however.

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We remain positioned with below-average net equity exposure in tactical portfolios for now. We’re inclined to think there may be more trouble ahead for the stock market.

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We examine the highly ranked Automotive Retail group and explain why, despite its recent strength, it may still have room to run.

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We examine the impact of March’s strong group leadership reversal on the top and bottom of our group model.

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All ten of the S&P 500 sectors recorded a sequential increase in four-quarter trailing net profit margins. But consider where sector margins stand today relative to their 25-year medians. Eight of ten S&P 500 sectors are recording profit margins well above their long-term medians.

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Last month we suggested the top sector for 2013 would fall from grace in 2014, and the Consumer Discretionary stocks have been quick to cooperate in the last five weeks.

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Momentum and Value worked in 2013. Materials and Financials were the easiest sectors to exploit; Discretionary and Tech the most difficult. Momentum works in December; Value and Small Caps at the start of the year.

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Both models have numerous Information Technology and Financials groups in Attractive territory. Neither model has any Unattractive Tech groups. Alternatively, neither model has any Attractive Utilities groups, while several Utilities rate Unattractive in each.

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Both models (particularly domestic) have a number of Attractive rated Information Technology groups and no Unattractive rated Tech groups. Financials’ domination of the Global Attractive range continues.

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We examine Emerging Markets from both the top-down and bottom-up perspectives as we try to identify where to move and what to expect. We check in on two successful EM thematic group ideas as well.

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Year-over-year EPS growth rate for companies with Q2 reports (with about 65% in) currently stands at +4.2%, while revenue growth has come in at a better than expected +2.6%.

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Our AdvantHedge Composite lost 5.9% in July, lagging the inverse performance of the S&P 500 (5.1%), but outpacing both the NASDAQ (6.6%) and the Russell 2000 (7.0%) as the market returned to “risk-on” mode.

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