Recent reports compiled by Bank of America Merrill Lynch shows that Wall Street now has a new favorite sector. Consumer discretionary overtook technology last month as funds increased in this sector. Consumer discretionary includes products and services like durable goods, entertainment, and automobiles. The consumer can essentially do without these goods but is inclined to purchase them if there are proper resources.
Consumer discretionary, Wall Street's new favorite
In February, the consumer discretionary sector showed a slight increase in funds whereas the tech sector slowed down and reached its lowest in fifteen months.
The previous year, the tech sector had been one of the heavily traded sectors and exhibited an extremely high performance. In addition, the tech sector increased by thirty-seven percent last year.
Currently, in the consumer discretionary sector, Amazon, the e-commerce giant, is among the highest performing individual stocks. Nearly fifty-one percent of the funds are holding stock. Right behind Amazon, in the second place is the Booking Holdings with thirty-eight percent of funds holding stock.
Fund managers are heavily investing in these sectors in accordance with the rising interest rates. In the previous month, the U.S. note hit the highest in four years as a result of the rising interest rates. The market is expecting three more hikes this year exceeding the market expectations.
Strong gains in the consumer discretionary sector are proving to be quite well for Wall Street. With all the gains in sight, it is no wonder that consumer discretionary is Wall Street's current favorite.
Why is the consumer discretionary sector significant?
A strong consumer discretionary sector indicates a strong economy and consumer confidence. Since these are the resources that consumers purchase when they come in contact with surplus funds, a strong consumer discretionary sector is indicative of consumers being able to afford more than the essentials. Consumer discretionary is also a strong indicator of the current state of the stock market.
A tight economy slows down consumer discretionary since consumers do not have the liberty to avail such goods and services due to limited availability of funds. A weakening economy restricts the consumer discretionary which, in turn, reduces sales for the companies that produce and sell these commodities. This leads to a further drop in stocks and shares and warning bells go off indicating an economic depression in the future.
A strengthening economy opens up new job opportunities for consumers. They are able to earn well in such an economy and surplus funds increase consumer confidence.