Consumer Cyclicals are Hot Again; Why are Retailers Attracting Long-Term Investors

In a previous blog post we wrote about the strong performance of the consumer discretionary (cyclicals) sector:


Chart 1. The Fidelity Select Consumer Discretionary Fund (FSCPX) performs strongly in 2017

On the other hand, it seems to be important this year to select the right sub-sector within the large cyclicals group. For example, as we observed earlier,  media stocks turned negative, while the leisure sub-sector has turned red-hot.

A third investment choice to consider is the retail sub-sector, which is often overlooked due to recent weak earnings and store closures by brick-and-mortar retailers, such as Macy’s.

We argue here that while online retailers, such as Amazon, have gained market share, consumer spending overall continued to be strong. That’s why we like the Fidelity Select Retailing Fund (FSRPX):


Chart2. The Fidelity Select Retailing Fund (FSRPX) performs strongly in 2017, in part due to investing in both online and brick-and-mortar retailers.

Looking at the long-term picture makes it even more compelling to invest in the retail sub-sector:


Chart 3. The five-year chart of the Fidelity Select Retailing Fund (FSRPX) shows that a long-term bet on increasing consumer spending has worked very well.


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Sector Rotation: Declining Oil Price Boosts Retailing and Automotive Stocks

The price of energy-related commodities, such as light crude oil, experienced a sharp short-covering rally at the beginning of the week, but the downtrend appears to be resuming again:


As consumers save money at the gas pump, they have more disposable income to spend at the shopping mall or to purchase merchandise online, which boosted the earnings prospects of companies in the retailing sector. The Fidelity Select Retailing Fund (FSRPX) is an excellent way to take advantage of this trend:


Car company stocks also responded positively to declining energy prices. Should this trend continue into the summer months, the strategy of overweighting the Fidelity Select Automotive Fund (FSAVX) and underweighting energy stocks may offer the most optimal portfolio allocation approach:




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Breakout: the technology and the consumer discretionary/retailing sectors are emerging as the market leaders

The beginning of the earnings season has brought about an impressive stock market rally. Improved sentiment in Europe was also helpful. The fact that all Fidelity sector funds gained today is an indicator of how broad-based the buying was.

The technology sector is providing leadership to the market, as so many times in the last 20 years, with multiple companies reporting strong earnings results. The United States is the undisputed world leader in technology innovation and companies like Google, Apple, Amazon and eBay continue to reward their shareholders with growth.

In addition to the large cap tech companies, a large number of medium and small sized companies are developing breakthrough technologies promising to make our lives more efficient, safer and more enjoyable. We will continue to keep an  eye on investment opportunities in the technology sector.

Fidelity Select Software & Comp fund (FSCSX, change: 2.10%)

Fidelity Select Software & Comp fund (FSCSX, change: 2.10%)

Consumer discretionary and retailing stocks are also responding to the increased appetite to buy equities and can provide leadership to the market in the coming weeks.

Fidelity Select Retailing fund (FSRPX, change: 1.85%)

Fidelity Select Retailing fund (FSRPX, change: 1.85%)

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