DISCRETIONARY SPENDING

Investors often turn their attention to consumer confidence when deciding between these two sectors. This crucial economic indicator, tracked by the University of Michigan’s consumer sentiment index, closely monitors consumer spending habits and optimism about the economy. Combined with metrics like the unemployment rate and inflation, they help predict consumers’ willingness to spend. Conversely, consumer staples stocks can be more resilient to changes in the business cycle since they provide essential items like food and beverages. Companies like Procter & Gamble (PG), Coca-Cola (KO), and Hershey (HSY) belong to this group. There are two options for how fund managers select securities within the ETF sphere — passive and actively managed funds.

Companies that supply these types of goods and services are usually either called consumer discretionaries or consumer cyclicals. The household durables industry manufactures products that cannot be consumed immediately and are bought only infrequently. Examples of household durable goods include lawn and garden equipment, home and office furnishings, appliances, photographic equipment, and sporting goods. Examples of restaurant, hotel, and leisure companies include McDonald’s Corporation (MCD) and Carnival Corporation (CCL), a cruise vacation company. H&R Block provides tax preparation, tax advice, and planning services, while Graham Holdings is a diversified education and media company with well-known brands such as Kaplan, Inc. and The Slate Group. The key is to monitor this spending behavior closely, particularly if geopolitical factors or higher inflation throws a wrench on the trend.

The industry is highly competitive and consists of numerous companies of different sizes. With increased accessibility to mobile devices, faster internet, and quick shipping, demand for online shopping has significantly grown. Some of the companies in this group include Etsy (ETSY), Chewy (CHWY), and Flowers.com (FLWS). We’re transparent about how we are able to bring quality content, competitive rates, and useful tools to you by explaining how we make money.

Consumer Discretionary Sector: Industries Snapshot

Any estimates based on past performance do not a guarantee future performance, and prior to making any investment you should discuss your specific investment needs or seek advice from a qualified professional. There are several ETFs that track the entire consumer discretionary sector, and there are also several that track specific consumer discretionary subindustries, like retail or video games. Buying several individual stocks can be costly — both in terms of share prices, and in terms of the time you should spend researching those stocks. The leisure products industry is made up of companies that sell nonconsumable goods that are used for fun. Camping equipment companies such as Camping World (CWH) would fit into this category. Below is a list of the five best-performing consumer discretionary stocks in the S&P 500 index, ordered by one-year returns.

They are usually related to leisure, fashion, luxury, gift items and cultural products, although they can also be included, depending on their special characteristics, furniture and other household products. In growth phases, personal income and personal spending tends to increase, leading to more purchases of consumer discretionary products. During contractions, personal income and personal spending are usually lower and spending on consumer discretionary products decreases. The reduced demand for consumer discretionary products is usually a precursor of lower sales for the companies that produce these products. Lower sales can lead to worsening economic conditions and greater economic contraction. When people do not have enough money, they tighten their budget and cut out unnecessary expenses.

How Do Consumer Staples Relate to Consumer Discretionaries?

Although it’s a restaurant chain, the emphasis on value gives it some elements of a consumer staples company. After all, everybody needs to eat, and it’s easy to get a cheap and convenient meal at McDonald’s. Focusing on well-known brands and industry leaders in this sector is generally a formula for success since the best stocks have long been winners for investors. These companies should also be better able to weather a recession and endure the ongoing bear market since they have deeper pockets and brand equity to fall back on. Access to our research can help you better understand the industries and companies that make up this sector, with timely performance data and stock, mutual fund, and ETF screeners.

Real gross domestic product rose 1.1% in the first quarter of 2023, according to the Bureau of Economic Analysis’ advance estimate, after rising 2.6% in the fourth quarter of 2022. It is an expression used in finance to indicate the consumer segment that is subject to the discretion of consumers, to contrast with consumer staples. Companies that convert unfinished goods into finished durables used to manufacture other goods or provide services.

McDonald’s Corporation (NYSE:MCD)

No matter how bad the economy gets, people will still spend money on food because they have to eat something each day. The consumer discretionary sector’s manufacturing segment includes automotive, household durable goods, textiles & apparel and leisure equipment. The services segment includes hotels, restaurants and leisure facilities, media production and related services, consumer discretionary meaning and consumer retailing and services. In general, when the economy is strong, consumers earn more and spend more on consumer discretionary products. On the other hand, when an economy is contracting, consumers usually earn less and focus their spending more on products essential to their needs. These are known as consumer staples, also referred to as consumer defensive.

• The hotels, restaurants, and leisure industry comprises companies that operate hotels, fast food restaurants, resorts, casinos, and cruises.
• The demand for consumer discretionary goods is typically much more elastic in comparison to consumer staples goods.
• With the economy continuing to reopen, Disney looks poised to be among the winners in the recovery.
• The fund has about $19 billion in assets under management and an expense ratio of 0.10 percent.

Our editors and reporters thoroughly fact-check editorial content to ensure the information you’re reading is accurate. We maintain a firewall between our advertisers and our editorial team. Our editorial team does not receive direct compensation from our advertisers. Carmakers, clothing labels, restaurants and retailers all fit into one of its four industry groups.

Economists use consumer discretionary companies to judge the state of the overall economy. It is just one of several tools economists use to determine how the economy is doing. An investor can use economic indicators to predict if consumer discretionaries will rise or decline in value. The following indicators can also tell you a great deal about the overall state of the economy. Industry performance is a useful gauge of trends in consumer spending. Consumer discretionary industries tend to thrive when people feel confident about income and spending is strong.

For instance, consider the global pandemic when people were not traveling. With the increase in demand, many consumer discretionary stocks like Home Depot (HD) and Lowe’s (LOW) rose in value. Bankrate.com is an independent, advertising-supported publisher and comparison service. We are compensated in exchange for placement of sponsored products and, services, or by you clicking on certain links posted on our site. Therefore, this compensation may impact how, where and in what order products appear within listing categories, except where prohibited by law for our mortgage, home equity and other home lending products.

This household name in family entertainment has been a staple of U.S. pop culture for generations. The company’s theme parks and animated movies are popular everywhere. Today, the company also owns ABC, ESPN, Pixar, Marvel, Star Wars, a majority stake in Hulu, and a vast array of assets that it acquired from Fox in a 2019 deal. It has increased payments to shareholders each year since the mid-1970s, making the company a Dividend Kings. With a payout ratio of around 60% of earnings, McDonald’s can comfortably maintain its dividend.

TJX Companies

The consumer discretionary sector of the economy encompasses various industries, the companies of which produce consumer discretionary products. Individuals can focus their investing on this sector by buying consumer discretionary stocks, mutual funds, and ETFs. The consumer discretionary sector comprises businesses that sell nonessential products and services that consumers may avoid without any major consequences to their well-being. Unlike consumer discretionary goods, consumer staples products, such as food, beverages, and tobacco, are goods that consumers tend to buy regardless of where the economy is in its business cycle.

We follow strict guidelines to ensure that our editorial content is not influenced by advertisers. Our editorial team receives no direct compensation from advertisers, and our content is thoroughly fact-checked to ensure accuracy. So, whether you’re reading an article or a review, you can trust that you’re getting credible and dependable information. Our mission is to provide readers with accurate and unbiased information, and we have editorial standards in place to ensure that happens.

Economic cycles have a big influence on earnings power and consumer spending in an economy. Consumer discretionary is a term that describes goods and services that consumers consider non-essential but desirable if their available income is sufficient to purchase them. The hotels, restaurants, and leisure industry comprises companies that operate hotels, fast food restaurants, resorts, casinos, and cruises.

From sit-down restaurants like Texas Roadhouse (TXRH) to hotel operators such as Hilton (HLT), these brands have a tight grip on consumer spending. Bankrate follows a strict
editorial policy, so you can trust that our content is honest and accurate. The content created by our editorial staff is objective, factual, and not influenced by our advertisers. Researching an ETF is often easier than researching individual stocks, but it’s still worth doing, since ETFs are not without risk.

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New cars, restaurant meals and luxury clothes are all examples of discretionary products. During an economic contraction, people cut back on non-essential items. This is because they do not have enough disposable income to afford these products.

• Companies involved in the exploration and production of energy products, such as oil, natural gas, and coal.
• Both product classifications are influenced by cycles of the economy.
• Any estimates based on past performance do not a guarantee future performance, and prior to making any investment you should discuss your specific investment needs or seek advice from a qualified professional.
• You might be wondering whether the automobile industry really belongs in the consumer discretionary sector, given that many Americans need a car to get to work.

Companies involved in providing medical or health care products, services, technology, or equipment. The company’s business has generated wide profit margins and solid growth over the years. It plans to expand to more than 6,000 stores globally, up from about 4,500 today. Research Sector and Industry performance   Get the latest news and analysis for sectors and industries. The car manufacturing industry is cyclical, and therefore this creates a fluctuating demand for auto parts, resulting in high volatility in the industry’s profitability. On top of that, many auto part manufacturers face cost variability due to changing prices of raw materials, such as copper and steel.

Some of its top holdings include Tesla (TSLA), Nike (NKE), and Starbucks (SBUX). The diversified consumer services industry includes everything else that fits under the consumer services umbrella. An education services company like Bright Horizons Family Solutions (BFAM) would be an example.