4 Consumer Staples Stocks To Count On This Earnings Season

Consumer staple stocks seem to have rebounded in October, following August’s market rout and a slump in September. After a weak second quarter, marked by earnings decline, sluggish growth rates and weak revenues, the picture has likely improved in the third quarter. Stocks seem to have overcome broad macro headwinds including weak economic reports from China and global growth worries.

Hints from Federal Reserve

The Federal Reserve has recently hinted at a December rate hike in its two-day FOMC meeting. The Fed statedthat it will “assess progress toward its goals of maximum employment and 2% annual inflation” in determining whether to increase the interest rates for the first time in almost a decade at its next meeting on December 15–16. It cited that recent headwinds are fading with substantial positive developments seen in the global economy and financial market lately. In particular, the Chinese economy is showing signs of stabilization on the back of better-than-expected GDP growth data and another rate cut while the Japanese and European central banks are taking additional stimulus measures to revive their economies.

Dovish Monetary Stance from ECB, China

European Central Bank (ECB) President Mario Draghi’s dovish comments on Oct 22 also had a positive impact on broader markets. He indicated that the central bank could expand its quantitative easing measures at its December meeting.

Separately, the People's Bank of China (PBOC) announced on Oct 23 that they reduced the key rates in order to boost the economy. PBOC reduced the one-year benchmark bank lending rate and one-year benchmark deposit rate by 25 basis points to 4.35% and 1.5%, respectively, effective from Oct 24.

A soft monetary stance from the ECB and China’s central bank contributed to strong market gains in October.

Besides improving macro factors, consumers are also benefiting from rising wages and cheaper fuel. With oil and natural gas prices subsiding, consumers are left with more disposable income. Consumers are also expecting lower inflation primarily due to lower gas prices. Commodity costs have in many cases stabilized.

A decline in commodity prices are also improving profit margins for certain staples companies.

However, there are many consumer staple stocks, which are still suffering from continued pressure in the face of limited consumer spending, foreign exchange headwinds, declining unit volumes and other global issues. Continued appreciation of the U.S. dollar relative to most foreign currencies has become a serious headwind to the earnings of U.S.-based staples companies with significant international operations like Kimberly-Clark Corporation (KMB), Mondelez International, Inc. (MDLZ), The Procter & Gamble Co. (PG), Altria Group, Inc. (MO) and General Mills, Inc. (GIS). All these companies reported weak top line growth in the third quarter due to significant currency headwinds. Moreover, they do see currency headwinds abating anytime in the near future.

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