Consumer discretionary stocks are those of companies that provide a certain type of goods and services to customers. If you look at your own spending habits, you can gauge which companies fit into the consumer discretionary sector by considering whether you purchase the company's goods because you need them or because you want them. Those products that you purchase because you want them, and that you could bypass if you did not have the available income, fit into the consumer discretionary sector.
Morgan Stanley Capital International and Standard & Poor's together developed and maintain the Global Industry Classification Standard, which is also known as the GICS. This widely used standard divides stocks into general sectors. Companies in each sector share similar characteristics and behaviors, so that they can be tracked as a group and their activity can be predicted with some accuracy based on economic conditions. Consumer discretionary is one of the 10 sectors in the GICS. The other stock sectors are materials, energy, industrials, consumer staples, health care, financials, information technology, telecommunications services and utilities.
The consumer discretionary sector features companies from varied fields. The sector includes automobile manufacturers and the producers of the components used to make vehicles. It also includes companies related to travel and vacations, such as hotels, resorts, cruise lines, casinos and restaurants. The broad category of consumer durables and apparel is part of the sector. Within that category lie companies from such areas as consumer electronics, appliances, home furnishings, textiles, apparel and footwear. Also included are media categories such as publishing, television, movies and advertising. Finally, consumer discretionary involves different species of retail, such as online, department stores, home improvement, catalogs and even the distributors that transport the items to stores and customers. Consumer discretionary stocks account for about 9 percent of the stocks in the world.
Consumer discretionary stocks are most closely linked with consumer staples stocks. Both cover sectors populated with companies that offer goods and services to consumers. However, consumer staples stocks are firms that provide customers with necessities -- those goods and services that customers require regardless of their financial condition. As with consumer discretionary, retail plays a central role in the consumer staples sector, particularly food, beverage and pharmaceutical retail. Similarly, the companies that produce food, beverages, pharmaceutical drugs and tobacco live in the consumer staples sector. Also in the sector are household and personal products, such as soap, laundry detergent, toothpaste and other cleaning and hygiene supplies.
The performance of consumer discretionary stocks generally is linked to the state of the economy. Consumers are more likely to spend part of their income on goods and services that they do not need when the economy is strong and they have more discretionary income at their disposal. This gives consumer discretionary stocks greater volatility than consumer staples stocks, which are much less tied to the economy because of their need in good and bad times. Consumer discretionary stocks, however, are not all tied to the economy in lock step. Some categories within the sector act more independently of the general economy than others.