The consumer staples sector has been soft in recent months. The sector, which consists of companies that manufacture and sell products that are considered recession-proof, like food, detergent, and toothpaste, has underperformed the S&P 500 over the past three months.
The following chart compares that sector, represented by the S&P Select Consumer Staples ETF (XLP) , with the overall market, represented here by the SPDR S&P 500 ETF (SPY) . Also shown is J.M. Smucker (SJM) , a consumer staples stock which has dropped sharply since announcing an acquisition last week.
The chart demonstrates that J.M. Smucker (green) is weaker than the consumer staples sector (red), which in turn is weaker than the overall market (blue).
Chart Source: TradeStation
Why is the consumer staples sector performing poorly? Consumer staples are popular investments when a recession is near, and lose that popularity as the probability of a recession wanes.
Of course, the probability of a recession, and the degree of its severity, is debatable. There is plenty of evidence, such as rising credit-card debt and dwindling savings, that a recession is still possible.
According to the following chart from the St. Louis Fed, total U.S. consumer credit card debt now exceeds $1 trillion.
Chart Source: St. Louis Fed
While credit-card debt continues to rise, personal savings are dwindling. After a huge boost in early 2020, savings have declined to pre-pandemic levels.
Chart Source: St. Louis Fed
While the above factors point toward economic weakness, Goldman Sachs (GS) recently indicated that the odds of a U.S. recession have dropped to just 15% from 20%. In July, Goldman lowered the odds from 25% to 20%.
As fear of a recession subsides, the consumer staples sector loses its appeal. As a result, investors have been selling stocks in this sector, and bearish patterns are appearing. One such pattern, currently visible in XLP, is known as a descending triangle (dotted lines).
Chart Source: TradeStation
A descending triangle has also formed on Smucker, but an announced deal to purchase Hostess Brands (TWNK) for $5.6 billion has caused a breakdown on heavy volume. Clearly, Wall Street doesn't like this deal, and institutions have been selling Smucker on the news.
Chart Source: TradeStation
Time will tell if Smucker overpaid for Hostess, but I'm not waiting around to find out.
We bought this stock for $135 at the end of 2021, so despite the beating Smucker is currently taking, we can exit with a loss of just 4.5%. That's exactly what we're going to do.
Bottom Line
Smucker is a weak stock in an underperforming sector, making it an unattractive name to own right now.
