Mean reversion – it’s a tale as timeless as the market itself. In its simplest form, stocks that have performed poorly are often winners in the future: last year’s losers become this year’s winners. The problem is that sometimes the change in action can actually move too far. Losers take on a life of their own as winners. Valuations, potential and yields often become just as disjointed from reality as when they were underperforming.
You could make the argument that this is exactly what is happening with consumer discretionary stocks these days.
After being sold hard during the pandemic, the snapback has been breathtaking. Perhaps too much so. These days the consumer discretionary sector is one of the most expensive industries in the market. The issue is that while the prognosis for the economy has changed, nothing has improved and there are still plenty of worries. For investors, the time to take a break on the discretionary sector could be now.
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