Definition
Consumer Discretionary refers to a category of stocks or sectors that consists of companies that sell non-essential goods and services. These are goods and services that consumers can avoid without experiencing major life impacts. The consumer discretionary spending increases when the economy is strong and decreases in times of economic downturns.
Phonetic
kənˈsjuːmər dɪˈskrɛʃənri
Key Takeaways
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- Consumer Discretionary refers to goods and services that are deemed non-essential: These are the goods and services that consumers are more likely to buy when they have more disposable income. They include items such as new cars, dining out, fashion, and leisure activities.
- It is sensitive to the economic cycles: The demand for Consumer Discretionary products tends to fluctuate with the health of the economy. When the economy is doing well and consumers are confident, they are more likely to spend more on these non-essential items. Conversely, during economic downturns, demand for these goods and services may decrease as consumers tighten their belts.
- Investment opportunities: For investors, the Consumer Discretionary sector can provide rewarding opportunities, especially during periods of economic growth. However, due to the significant fluctuations during different economic cycles, investing in this sector also carries risks.
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Importance
Consumer Discretionary is a crucial term in business and finance as it refers to the sector involving businesses that sell non-essential goods and services, such as automobiles, apparel, and entertainment. It is significant because it reflects the overall economic health and consumers’ confidence level. When consumers feel confident and have surplus income, they are more likely to spend on these discretionary goods and services, boosting this sector’s revenue. Conversely, during economic downturns, this sector often suffers as consumers prioritize necessary expenses. Therefore, an understanding of Consumer Discretionary can give valuable insight into consumer behavior, economic conditions, and potential investment opportunities.
Explanation
Consumer discretionary is a term used to describe the sector of the economy relating to goods and services that are considered non-essential, but desirable when consumers have sufficient income to purchase. Rather than staples like food and clothing, the consumer discretionary category is populated by things like entertainment, automobiles, and consumer electronics. This sector is closely tied to the state of the economy, and its health is often a good barometer of overall confidence and financial well-being among consumers.The purpose of the consumer discretionary sector is to capture spending patterns on luxury items or upgrades beyond what is necessary for survival. It serves as an important economic indicator, as it often grows when income, consumer confidence, and disposable wealth increases, thereby giving way to higher discretionary spending. Therefore, it is diligently watched by economists, analysts, and investors. The performance of companies in the consumer discretionary sector can be an important tool for investors to gauge the overall health of the economy, predict economic or market turns, and to possibly spot investment opportunities.
Examples
1. Automobile Purchase: Automobiles fall under the consumer discretionary category as they are significant purchases that are not immediate necessities. Consumer spending on automobiles increases during strong economic periods when disposable income is high and lowers when the economy is weak.2. Luxury Goods: High-end products such as designer clothes, expensive watches, and luxury handbags are prime examples of consumer discretionary. The purchase of these items is largely dependent on a consumer’s disposable income. These are not things that people need for basic living, but rather are items they choose to purchase when their income allows them to do so.3. Dining Out and Travel: Spending money on restaurant meals, vacations, and other entertainment or leisure activities are also consumer discretionary spending. These expenses are often the first to be cut when a consumer’s budget tightens, and they tend to increase when the economy is strong, and consumers have more disposable income to spend.
Frequently Asked Questions(FAQ)
What is Consumer Discretionary?
Consumer Discretionary is a term for goods and services that are considered non-essential, but desirable if consumers have the disposable income to purchase them. It includes items like high-end appliances, vacations, and entertainment.
Which industries fall under Consumer Discretionary?
Industries in consumer discretionary category include automobile manufacturing, hospitality, luxury goods, leisure equipment, consumer retailing, and services.
How does the economic environment affect Consumer Discretionary spending?
During times of economic growth, consumer confidence tends to be higher and consumers spend more on discretionary goods and services. However, during economic downturns, discretionary spending is often the first to be cut, as consumers prioritize essential needs.
Why is tracking Consumer Discretionary important for investors?
Tracking consumer discretionary spending can help investors gauge the overall health of the economy and predict potential future trends. Companies that produce discretionary goods and services can be a good investment in times of economic prosperity and less so in downturns.
How does Consumer Discretionary differ from Consumer Staples?
Consumer Staples include products that people need to live their everyday lives, such as food, beverage and household goods. Consumer Discretionary, on the other hand, encompasses non-essential goods and services that people want to buy when they have excess income.
Does Consumer Discretionary spending effect the stock market?
Yes, high consumer discretionary spending can often be a positive sign for the stock market. It signals strong consumer confidence, rising disposable income, and potential economic growth, which can lead to higher stock market returns. Conversely, a decline in this spending can signal a slowing economy.
Can Consumer Discretionary spending include online purchases?
Yes, consumer discretionary spending can include both brick-and-mortar and online purchases, as long as they are of goods or services that are considered non-essential.
Related Finance Terms
- Economic Indicator
- Disposable Income
- Luxury Goods
- Retail Industry
- Purchasing Power
Sources for More Information
