Need Beats Want, And What It Means For Stocks

“A table, a chair, a bowl of fruit and a violin; what else does a man need to be happy?” -Albert Einstein

There are certain sectors of the market which are important to watch to get a sense of market sentiment. The Consumer Staples sector, for example, characteristically is considered among the most “stable” of areas of the market given its lower sensitivity to market averages and high dividend yield. Stocks in this group tend to consist of those which are less cyclical in nature, and as such do not participate as aggressively on both the up and downs of the economy. After all, financial crisis or not, people need to eat, people need to use toiletries, etc. As such, Consumer Staples are the “need” sector of the market.

On the opposite side of the spectrum is the Consumer Discretionary side of things, which consists of companies that tend to participate in a bigger way to economic swings. Theme parks, fashionable clothing, jewelry, games, etc. are all things which we aspire to have and enjoy, but would not absolutely need in a deep economic contraction. As such, unlike the Consumer Staples sector, Discretionary stocks are the “want” side of things, which do well in better economic environments.

Generally, when Need (Consumer Staples) outperforms Want (Consumer Discretionary), it’s a signal of continued concerns over market volatility and the economy. Take a look below at the price ratio of the Consumer Staples Select Sector ETF (XLP) relative to the Consumer Discretionary Select Sector ETF (XLY). As a reminder, a rising price ratio means the numerator/XLP is outperforming (up more/down less) the denominator/XLY.


Notice how well defined the ratio trend has been historically, and how an uptrend coincides with a difficult environment for equities. The ratio began rallying at the very start of May as the “mini-correction” in equities took place, and has since continued to lead. The trend remains up, but may be nearing a resistance point. Signs of a reversal should be paid close attention to in the coming weeks. When it does, broader equity. averages and risk-sentiment likely recover alongside it.

This writing is for informational purposes only and does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction, or as an offer to provide advisory or other services by Pension Partners, LLC in any jurisdiction in which such offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Pension Partners, LLC expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing.