A Quick And Simple Way To Bet On The Economy’s Next Steps

A Quick And Simple Way To Bet On The Economy’s Next Steps
Stéphane Renevier, CFA

almost 2 years ago1 min

Mentioned in story

This year has seen investors flock to recession-resistant consumer staples (purple line) and steer clear of growth-dependent consumer discretionaries (orange line): they’re up 2% and down 18% respectively. The extent of the divergence shows investors might be even more worried about the economy than the 12% drop in S&P 500 (blue line) suggests, but it also reveals a chance to profit.

Let’s say you’d rotated from discretionaries into staples at the start of the year: you’d have kept your exposure to stocks, but avoided a 12% loss. Or if you wanted to play offense, you might’ve bought consumer staples and shorted the S&P 500 (or even exclusively shorted discretionaries, if your broker let you). In that case, you’d have pocketed the full 14% difference in performance between staples and the S&P 500 (or 20% between staples and discretionaries). And if the performance of the two had diverged even further, you’d have stood to make even more.

What this shows is that you can use the defensive or cyclical characteristics of staples and discretionaries to profit from your view of the economy at any given time. So if you’re feeling bearish right now, go for consumer staples stocks to play it safe, or buy staples and short the market for a more assertive play. If you think stocks will rebound, buying consumer discretionaries should lead to higher returns than buying the overall S&P 500.

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