Restaurant Sector: It Wasn’t Impacted Hard Like the Other Sectors
Recent Turmoil in the Stock Market Impacts Restaurant Stocks
Restaurant sector
While the overall S&P 500 Index lost its YTD (year-to-date) gain over the past 15 days, it wasn’t all bad for the restaurant sector. The S&P Restaurant Index still remained in positive territory. It’s holding a YTD gain of 12%.
This is unlike the commodities sector. The PowerShares DB Commodity Tracking ETF (DBC) fell 22%. In the oil sector, the United States Oil (USO) fell 37% YTD. When exports and domestic consumption slowing in China, it translates into weak commodity demand. This causes commodities to fall.
Conditions in the US
Restaurants don’t particularly have these risks, especially if they’re primarily operating within the US. This is because they’re more dependent on the economic situation in the US. Most of the US is driven by its service economy. For example, Chipotle Mexican Grill (CMG) and Panera Bread (PNRA) operate 98% of their restaurants within the US. These two restaurants have a YTD return of 3.30% and 1.20%, respectively. Chipotle, McDonald’s (MCD), and Yum! Brands (YUM) account for 6.50% of XLY’s portfolio.
The US economy has displayed strength recently with improved overall business conditions since the financial crisis of 2007–2008. In the above chart, you can see that the ISM Non-Manufacturing Business Activity Index is at 64. This signals expansion. It’s healthy for the economy.
The unemployment rate is at 5.30%—its lowest point since 2009. Recently, the personal income growth rose to ~3% levels annually—compared to negative growth five years ago. Combined with the low inflation environment, this has boosted the personal disposable income to grow at the rate of 3% annually. Consumers’ confidence regarding the economy is high at 92—compared to the low of 56 in 2009. This led to an increase in foodservice sales. They stand at 2.20% YoY (year-over-year). This is above the 15-year average of 1.10%. It indicates a healthy environment for business in the US. It indicates a strength in the environment that supports the restaurant industry’s growth in the US.
So, which stocks are more sensitive to China and Asia-Pacific growth? We’ll discuss this in the next part of the series.
Browse this series on Market Realist:
