Global Trading Dispatch | Why Consumer Staples are Dying

Everyone always needs toilet paper, right?

Wrong. At least stock investors don’t.

Once considered the safest stock market sectors in which to hide out during bear markets, consumer staples have been beaten like a red-headed stepchild.

Take a look at the Consumer Staples Select Sector SPDR ETF (XLP). It’s top five holdings include Procter & Gamble (PG) (11.13%), Coca-Cola (KO) (10.07%), PepsiCo, Inc. (PEP) (8.7%), Philip Morris (7.80%) (PM), and Walmart (WMT).

Its only attraction is that it has a 30-day SEC yield of 2.87%.

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The (XLP) has been one of the worst performing ETFs of 2018, down a heart-stopping 14%. And it appears that conditions are going to get worse before they get better – a lot worse.

In short, the industry is caught in a vise.

Globally rising commodity prices are relentlessly rising, increasing their costs. If you are in the toilet paper business there are no substitutes for paper pulp (eucalyptus pulp as it turns out).

In the meantime, ferocious online competition from the likes of Amazon (AMZN) make it impossible to pass costs of consumer staples on to consumers as they did in past economic cycles.

In fact, the prices for many consumer staples are falling. And if you are an Amazon Prime member, it will be delivered to your door for free.

It gets worse. The largest sector of the consumer staples market, the poor and working middle class, are seeing the smallest wage gains. Almost all pay increases are now taking place at the top of the wage ladder.

AI specialists and online marketing experts, yes; Safeway checkout clerks and fast-food workers, no.

This also will get a lot worse, as some 50% of all jobs will disappear over the next 20 years, mostly at the low end.

Blame technology. There is even a robot now that can assemble Ikea furniture. And there goes my side job!

So, if your friend at the country club locker room tells you it’s time to load up on consumer staples because they are cheap, ignore him, delete his phone number from your contact list, and defriend him on Facebook.

If anything, the sector is a great “sell short on rallies” candidate.

As I never tire of telling followers: Never confuse “gone down a lot” with “cheap.”

Eventually, the sector will fall enough to where it offers value. But that point is not now. There has to be a bottom somewhere.

After all, everyone needs toilet paper, right? Or will a robot soon take over that function as well?