Consumer discretionary stocks are becoming riskier this year, according to the marketing strategists. Consumers are wary of the market and this is affecting the discretionary stocks.
The Federal Reserve System is currently focused on hiking the interest rates and this is likely to go on for the next two years. In such a scenario, the consumer discretionary sector has to focus on selling high in order to stay afloat.
The impending rise in the interest rate coupled with an average consumer laden with debt has posed as twin threats to the consumer discretionary sector this year.
Consumer discretionary sectors to face decreased sales
There has been some level of spending from consumers, but market strategists have warned that with the current state of the economy, this trend cannot be expected to keep pace.
Since the previous year, retail sales have dropped unexpectedly and shown very low gains in February of this year. This has surprised economists who were expecting a slight gain, and it seems as though the consumer discretionary is at the lowest since 2012.
The consumer is not all out but even so, the aging bull market has given out some warning signs and it is best for investors to remain cautious and scale back for the time being. Household debt in the U.S. has been on a rapid increase and personal savings are at the lowest level since 2008.
Consumer purchases have been backed up by credit and debit.
The market is in such a delicate stage that even the slightest drop in consumer confidence can change the course of the consumer discretionary sector. As consumers hesitate to spend and focus more on saving, there is a significant downfall in consumer spending.
An increase in the interest rates by the Federal Reserve will mean an increase in interest rates on loans and consumers will no longer be able to avail cheap debt. What's worse is that according to reports, the Central Bank will be raising the interest rates three times in this year alone. This means a further dent in consumer spending.
Naturally, higher interest rates and expensive loans mean a decrease in consumer spending and companies in the consumer discretionary sector will be among the first to face the detrimental effects of such a scenario.
The consumer discretionary sector represents products that are not essential in the daily life of a consumer. These include jewelry, expensive automobiles, and entertainment.
Companies like Harley Davidson and Starbucks are expected to be the ones bearing the brunt of decreased consumer spending.