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The Worst Sector is Consumer Discretionary

Stocks sold off sharply at the opening and declined into the close. The Dow Jones Industrial Average fell 1,164.52-points or -3.57% today, suffering its worst daily decline since Jun 2020 as stagflation fears and double-digit selling in big retailers spooked investors. The S&P 500 Index shed 165.17-points or -4.04%. Wednesday’s decline puts the benchmark index within striking distance of an official bear market. The battered Nasdaq Composite Index lost another 566.37-points or -4.73% as selling resumed in technology stocks.

Surprisingly, the technology sector (XLK – 4.58%) was not the worst today. Today’s 6.54% selloff places the consumer discretionary sector (XLY) as the worst sector for the day (5/18/22), on a one 1-month basis (-20.54%), 3-month (-20.54%), 6-month (-31.96%), and 2022 YTD (-30.04%). All S&P sectors closed down for the day, including the defensive consumer staples (XLP -6.43%).

Within the consumer discretionary sector, the worst performing subindexes include speciality retailers (-9.59%), broadline retailers (-8.56%), clothing and accessories (-7.51%), and durable household products (-6.89%). Some of the larger retailers fell double digits – TGT (-24.93%), DLTR (-14.42%), COST (-12.41%), DG (-11.15%), UTLA (-10.83%), and BBY (-10.51%), and ETSY (-10.47%).

The narrative of an impending recession and even a stagflation cycle is quickly taking hold. The risk of the two economic scenarios has risen with the European economy visibly weakening, China in a Covid-19 pandemic lockdown, the Fed increasing with its hawkish rate hikes, and consumer confidence and investor sentiments falling precipitously.

Is the dramatic Wednesday’s selloff in broad market indexes and specifically in the consumer discretionary sector another warning sign to suggest a recession is much closer than expected?

Consumer spending remains a crucial leading indicator of economic conditions. Falling asset prices, declining interest rates, rising unemployment, lower consumer spending, and falling consumer confidence can lead to a negative feedback loop that tilts a slowing economy into an economic contraction.

The following pertinent questions need to be addressed:

How much of the recession risk is priced into the stock market?

How much is not price into the current stock market decline?

If a recession occurs, will it be a shallow or deep recession?

If stagflation emerges, will this lead to a structural bear decline in stocks?

What assets, sectors, and industries outperform during a recession, inflation, or stagflation?

Source: Chart courtesy of

Source: Chart courtesy of

Source: Chart courtesy of

Source: Chart courtesy of
Source: Chart courtesy of

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