The U.S. consumer staples index or .SPLRCS, which is the biggest laggard in 2018 on the S&P 500, could fall even further and might even become less appealing as a defensive maneuver if the economy were to turn sour.
This sector includes suppliers of what are considered recession-proof products from toothpaste and toilet paper to cookies and canned soup, and has fallen by 13% during 2018, and could be set for its first decline for a year since 2008. At the same time, the .SPX has increased by 1.7% since the start of the year.
Investors have turned away from the staples companies due to them grappling with the changing preferences of consumers, fierce competition as well as other types of obstacles to increased prices, even as costs swell.
The sector has been long considered a defensive play for investors partly because of the high dividends and a growth rate that has been predictable, but it now faces strong competition from the fixed income investments sector, while yields of U.S. Treasuries are increasing, and from other types of equities as the majority of industry groups have been generating quicker earnings growth.
Consumers have shown less loyalty to household and food brands than at any previous time, according to one investment manager with a Wall Street firm. Because of that, shoppers have been drawn easily toward less expensive store-brands for goods like toilet paper that has pressured brand names.
Preferences have grown for fresher, healthier food which keeps people from purchasing pre-packaged staples. Worries over health are hurting tobacco companies like Altria, as smokers have been increasingly favoring alternatives to cigarettes.
In addition, traditional brick and mortar retailers are facing fierce competition from retailers online like Amazon.com, which has lead them to pressure product suppliers to maintain low prices.
One good example is Proctor & Gamble, the largest maker of consumer goods in the world, cited pressure in April from struggling retailers as well as higher costs of transportation and rising prices of commodities when it posted fiscal third quarter results that disappointed.
Currently Wall Street expects earnings growth in 2018 of 11.4% for the staple sector, which is down from an expected 11.6% released April 1 and slower than all but a pair of the other 11 major sectors of the S&P 500.
The broader S&P index is expected to announce earnings growth in the range of 22% for 2018.