Rate rises to hit discretionary sector

“A lot of people have a weighting to this area and they are going to find it a lot tougher in the fourth quarter.”

Stocks are ‘expensive’ and investors should sell out now

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The fact consumer discretionary stocks are likely to face such a major headwind should be a concern for investors in the sector.

But there are other potential warning signs too. Consumer discretionary stocks have performed extremely well in the UK and the US.

The FTSE All-Share Consumer Goods and the Consumer Services sub-sectors have significantly outperformed the broader index in the past five years, while the picture is the same with the S&P 500 index.

Baml’s Savita Subramanian said the sector was “expensive” and the bank had suggested investors should sell out now to lock in the gains they had made.

Key examples are Walt Disney, which is trading on a price-to-earnings (p/e) ratio of 24.6 times and has seen its share price rise 241 per cent in the past five years.

Home Depot, another consumer discretionary stock, trades on a 22.9 times p/e ratio and its shares have risen 306 per cent, while Costa Coffee owner Whitbread has a p/e of 24.6 times and its share price is up 260 per cent.

Any slowdown in the economy or reduction in spending by consumers is likely to rattle these stocks.