Investing in Consumer Discretionary Stocks
High inflation and rising interest rates have made things difficult for consumer discretionary companies over the last few years. But with inflation falling towards target levels and plenty of talk of interest rate cuts, is now the time to consider consumer discretionary stocks?
In this article, we will explain what consumer discretionary companies are and highlight some of the best consumer discretionary stocks to watch in 2024!
Table of Contents
What Is a Consumer Discretionary Stock?
Goods and services can be split into two categories: things we need and things we want. The former of these are known as consumer staples, whilst the latter fall into the bracket of consumer discretionary. Consumer discretionary stocks, therefore, are the shares of companies which produce and/or sell these types of goods and services.
Whilst consumers will tend to always find money to purchase consumer staples, consumer discretionary items represent goods and services which consumers will purchase when they can afford to, but which will likely be the first casualties when the time comes to reassess a budget.
Investing in Consumer Discretionary Stocks
Because they produce goods and services which are non-essential, consumer discretionary stocks tend to be cyclical. In other words, they perform well when the economy is growing and poorly when the economic outlook darkens.
Consequently, as high inflation and rising interest rates have squeezed consumer budgets, many consumer discretionary stocks have struggled over the last couple of years.
Nevertheless, inflation is falling back to target levels and interest rate cuts are already underway. Both of these things are likely to have a positive effect on consumer demand and, consequently, could be beneficial for consumer discretionary companies.
The Best Consumer Discretionary Stocks to Watch
Due to their cyclical nature, when investing in consumer discretionary stocks, long-term investors might want to consider concentrating on businesses which have a proven track record, strong brands and a loyal consumer following.
In the following sections, we will highlight 3 consumer discretionary companies which fit these criteria and, consequently, will need little introduction.
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Amazon
As interest rates rose to combat decades-high inflation, shares of e-commerce giant Amazon plunged, shedding 50% in 2022.
However, as inflation began to subside and the Federal Reserve’s rate hikes became less aggressive, Amazon’s stock market fortunes quickly reversed. In 2023, amidst an improving economic outlook, Amazon’s share price rose 80%.
Lower inflation and interest rate cuts should complement Amazon’s e-commerce business further. Lower interest rates will mean more money in consumer pockets which is likely to lead to an increase in consumption. As the dominant player in the US e-commerce market, this should result in higher sales revenue for Amazon.
Starbucks
Although many people may view their morning coffee as a necessity, buying it in an expensive coffee shop, such as Starbucks, is not. Nevertheless, the coffee chain’s high level of popularity means that, for many, their daily Starbucks may be one of the last discretionary items they cut from their budget.
Consequently, whilst Starbucks should, in theory, benefit from any improvement in consumer demand brought about by lower interest rates, its strong brand may also provide it with an element of protection during a downturn.
Starbucks is a well-established company, with more than 38,000 stores across the globe. However, it remains committed to further growth, with plans to expand its global store count to 55,000 by 2030.
Starbucks is also a dividend paying stock, with a strong track record of payouts, having raised its annual dividend each year for the last 13 years. It currently has a dividend yield of around 2.5% at the time of writing.
McDonald’s
McDonald’s has been a market leader in the fast-food industry for decades with more than 40,000 locations around the world.
Despite being a consumer discretionary stock, the strength of McDonald’s brand and its popularity lend it certain defensive qualities. This is helped by the fact that McDonald’s has traditionally been viewed as a value option in the restaurant world. When times are hard, people tend to eat out less, but when they do, they tend to go to cheaper places.
However, rising prices means McDonald’s has struggled to maintain this status, with cost-conscious customers showing signs of shunning the fast-food giant in 2024. Nevertheless, McDonald’s responded swiftly by introducing a new $5 Meal Deal in an attempt to draw these customers back in.
Like Starbucks, McDonald’s is also a dividend paying stock with a long history of rewarding shareholders with payouts. It has raised its annual dividend every year since 1977 and currently yields 2.4%.
Consumer Discretionary ETF
As well as picking individual consumer discretionary companies to invest in, investors may choose to find an Exchange-Traded Fund (ETF) which focuses on investing in the consumer discretionary sector.
An example of a consumer discretionary ETF is the Vanguard Consumer Discretionary ETF, which tracks the performance of an index composed of stocks in the consumer discretionary sector.
How to Invest in Top Consumer Discretionary Stocks
With an investing account from Admiral Markets, you can buy shares in all three of the top consumer discretionary stocks highlighted in this article. Follow these steps to get started:
- Open an Invest.MT5 account.
- Log in to the Dashboard.
- Open the web trading platform.
- Search for a stock and click the symbol in order to open a price chart.
- Create a new order, enter the trade volume and click ‘Buy’ to send the order to the market.
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FAQ
What is a consumer discretionary company?
A consumer discretionary company is a company which produces non-essential goods and services.
What are examples of consumer discretionary goods?
Examples of consumer discretionary goods include automobiles, luxury goods, consumer electronics and furniture.
Does consumer discretionary do well in recession?
Typically, no. Since, by definition, consumer discretionary goods and services are non-essential, companies which produce these goods and services tend not to perform well during a recession.
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