XLY Consumer Discretionary Sector SPDR June Outlook—Bad getting worse as the few pockets of strength within the sector YTD couldn’t hold up in May. We are out of the Sector in June.
Price Action & Performance
XLY has been among the weakest Sectors over the past 1- and 3-year periods. Strength in Mag7 constituents AMZN and TSLA have masked some of the pain being felt within the Sector, but as 2024 has progressed TSLA has flipped to a downtrend and AMZN finally had a bad month in May. Homebuilders have also started showing cracks as higher rates and deteriorating fundamentals dent the “structural housing shortage” narrative that has fueled share gains and some speculation.
Economic and Policy Drivers
The Consumer Discretionary Sector is ground zero for the inflation fight as the rising cost of housing, fuel, education, and other services gnaws into household discretionary spending. Some areas like value oriented fast-food chains (CMG, DPZ, MCD) and off-price retail (TJX, ROST) can be expected to hold up. However, spending weakness is apparent in the home improvement category (HD, LOW), within the Automotive categories and across parts of the travel and leisure industry as well. Homebuilders which have been a stand-out are starting to lag as well, as interest rate policy makes homes unaffordable for more people and high labor costs dent margins and stall projects. The leisure categories are also under pressure as a tight labor market eats into profit ability across the broad retail service industry all while the consumer’s balance sheet adds more debt.
How Can XLY Help?
XLY offers the broad exposure needed to shift allocation at a low cost when prospects for the Sector are uncertain. With 52 stocks across 9 industries, XLY shares offer diversification at an affordable price. If sticky inflation turns out to be less sticky when the June’s CPI hits, adding to an XLY position would be a cost-effective way of covering shorts in some of the most washed-out stocks that would be likely beneficiaries of lower rate dynamics and lower inflation.
In Conclusion
XLY is in the eye of the inflation storm and performance has lagged over the intermediate term as the central bank keeps the caution flag up on the economy and higher fuel costs and finance costs crimp the consumer. Our Elev8 Sector Model chooses the 8 sectors we think are most likely to outperform each month and spreads the cap. weight from the 3 sectors we don’t select across those 8 positions as our overweight allocations. The XLY is one of our 0% allocation sectors for June in the Elev8 Model Portfolio with a net -9.86% UDERWEIGHT position.
Chart | XLY Technicals
- XLY 12-month, daily price (200-day m.a. | Relative to S&P 500 )
- Hit multi-year relative lows in May amidst deteriorating technical and fundamental backdrops
