Consumer Discretionary Sector

One of the ten sectors of the Global Industry Classification Standard (GICS), “consumer discretionary” refers to a sector of the economy made up of businesses that sell nonessential goods and services. This includes many retailers, service providers, media companies, apparel sellers, and automobile companies. Examples of companies from the S&P 500 that fall in the consumer discretionary sector include fast food chain McDonald’s Corp. (NYSE: MCD), household container maker Newell Rubbermaid Inc. (NYSE: NWL), and toy maker Hasbro, Inc. (NASDAQ: HAS) to name but a few.

One of the ten sectors of the Global Industry Classification Standard (GICS), “consumer discretionary” refers to a sector of the economy made up of businesses that sell nonessential goods and services. This includes many retailers, service providers, media companies, apparel sellers, and automobile companies. Examples of companies from the S&P 500 that fall in the consumer discretionary sector include fast food chain McDonald’s Corp. (NYSE: MCD), household container maker Newell Rubbermaid Inc. (NYSE: NWL), and toy maker Hasbro, Inc. (NASDAQ: HAS) to name but a few.

“Consumer discretionary” differs from “consumer staples” in that the latter contains businesses that sell necessities, like food and drugs.

Consumer Discretionary as an Economic Indicator

Companies in the consumer discretionary sector tend to perform in line with the state of the economy as a whole. Stock values fluctuate in response to issuer, political, regulatory, market, or economic developments. Thus, they improve when consumer confidence is high and people are freely spending money, and they tend to go down as the economy declines. As a result, performance in the consumer discretionary sector often indicates the condition of the economy and consumer confidence, and many economists and financial analysts use it as an indicator of overall economic performance.

According to Fischer Investments on Consumer Discretionary by Erik Renaud, in 2009, the consumer discretionary sector comprised approximately 8.8 percent of the world’s total stocks. This put it just behind consumer staples as one of the largest sectors in the GICS classification system.

Investing in the Consumer Discretionary Sector

Because of the way that stocks in the consumer discretionary sector track with overall consumer confidence in the economy, these stocks often become favorites of novice and experienced investors alike. The factors, which lead to better performance in the consumer discretionary sector, tend to be familiar to most people (e.g., employment rates, inflation, consumer debt loads). Thus, investors often feel they have a better grasp of how these stocks will perform based on news and events with which they are already familiar.

While it is possible to buy stocks in the consumer discretionary sector individually (indeed, this is how most are commonly purchased), some investors have taken to buying stocks in virtually all of the companies that comprise this sector simultaneously. This is done through investments in mutual funds or exchange-traded funds (ETFs) dedicated to the consumer discretionary sector. This buffers the investor against the risk involved with betting on particular companies (which can be as volatile as in any sector), and allows investors to ride trends in the sector as a whole instead.

Some investors also favor funds that invest in the consumer discretionary sector of a particular country. This allows the investor or the fund manager to follow the trends affecting that particular nation’s economy and make portfolio adjustments accordingly. Others prefer a broader, multi-national approach that allows one to moderate investment performance affected by the rise and fall in one particular country’s economy, balancing it against the performance of the global economy as a whole. Each approach has its merits, depending on the investor’s objectives, experience, and time available to follow economic and market trends.