Investors are back to playing defense.

Consumer staples stocks were trading higher on October 13 as markets widely anticipated higher interest rates and weakening economic conditions that could boost shares of companies selling essential products like food and toothpaste. 

Retailers Costco Wholesale Corp. (NASDAQ: COST), Dollar General Corp. (NYSE: DG) and Target Corp. (NYSE: TGT) were among the sector gainers, with Dollar General being the biggest. 

The Consumer Staples Select Sector SPDR Fund (NYSEARCA: XLP) was up 0.66%.

Preliminary October data from the University of Michigan's consumer sentiment report came in at 63.0, lower than estimates of 67.5. That number trailed last month’s reading of 68.1 and was the lowest reading since May.

Cosco Well Positioned for Economic Slowdown

Costco advanced 0.33%. There was no particular company news, although you could make an argument that Costco is a compelling stock during an economic downturn. 

The company's members-only model encourages customer loyalty and stable sales, as consumers seek value after shelling out some bucks to join the club. The company’s bulk purchasing power allows it to offer competitive prices, making it attractive during times of frugality, especially if you need a 24-pack of refried beans or two extra-large bottles of Hidden Valley ranch dressing. 

In addition, Costco's focus on essentials like groceries and household items, which consumers continue to buy regardless of economic conditions, ensures stable demand. 

MarketBeat’s Costco analyst ratings show a consensus view of “moderate buy” with a price target of $586.25, an upside of 3.60%.

Target To Hit the Bullseye Again?

Target, meanwhile, advanced 1.66%, tacking on gains to a 3.66% gap higher on October 10. At some point, it was all but inevitable that investors would jump in to nab Target shares at a low valuation, relative to the company’s earnings potential, which is quite strong.

While some attribute Target’s problems to negative coverage in some media outlets over the summer, many analysts believe Target’s merchandise mix and higher prices, relative to other discounters, sent shares lower. The company has also cited organized retail theft as a culprit.

MarketBeat’s Target analyst ratings show a Bank of America upgrade on October 12, which included a significant price target increase to $135 from $120. That’s an upside of 23.84%. 

More Dollars Going Into Dollar General

Beleaguered Dollar General gapped up 8.78%, making it not only the best performer in its sector but in the entire S&P 500. The catalyst was news that former CEO Todd Vasas would return to take the helm after the stock skidded 55% year-to-date. It’s its worst-ever yearly decline. 

In a statement announcing the appointment, Dollar General board chair Michael Calbert said, “At this time the Board has determined that a change in leadership is necessary to restore stability and confidence in the Company moving forward.”

Vasos was CEO between June 2015 and November 2022, during which time Dollar General stock advanced more than 220%. 

Investors Turn to Defensive Sectors

Overall, markets had a “back to basics” tone as utilities, healthcare stocks and energy were the only other sectors posting gains. 

The Utilities Select Sector SPDR Fund (NYSEARCA: XLU) was up 0.73% late in the session, while the Health Care Select Sector SPDR Fund (NYSEARCA: XLV) advanced 0.49%.

When consumers grow more pessimistic about the economy and their financial well-being, they tend to cut back on non-essential spending, like dining out, vacations, and luxury items. This benefits the consumer discretionary sector. 

Additionally, healthcare and utilities are considered defensive sectors. In times of economic uncertainty, investors often turn to those industries as safe havens, as they provide essential services that are less sensitive to economic downturns. 

Energy Returns With A Vengeance

Energy, meanwhile, has returned as a force to reckon with. The Energy Select Sector SPDR Fund (NYSEARCA: XLE) returned 2.35%, gapping higher on a combination of geopolitical concerns and previously announced production cuts. 

After taking a breather in the early months of 2023, energy has been back in rally mode since June, advancing 5.15% in the past three months.