With potentially big economic changes ahead this year, consumers may have less purchasing power in 2022. What does that mean for the automakers, leisure companies, and e-commerce stocks that make up the consumer discretionary sector?

In this clip from "The Rank" on Motley Fool Live, recorded on Jan. 31, Fool.com contributors Jason Hall, Dan Caplinger, and Matthew Frankel, CFP®, reveal why they're not optimistic about this market sector in the year ahead, and what could happen to change their minds.


Matt Frankel: We will move on to No. 9 sector. We were all pretty bearish on this one, too. This was my No. 11, so I will go first with this one, I guess, give my thoughts. This is consumer discretionary, as I mentioned, the worst-performing sector over the past year. If I were to wager on this, I would say that this is going to be the worst-performing sector of the next year as well. The reason is I just see so many headwinds for consumer discretionary stocks. These are things like internet retail, retailers that sell discretionary products, meaning things that you don't need. This includes automakers, it includes restaurants, hotels. I have several big favorites in here. GM, for example, is one of my biggest stock holdings and it's a consumer discretionary stock. I think MercadoLibre technically fits in consumer discretionary, which is one of our favorites.

Jason Hall: Amazon.

Frankel: Yeah, Amazon is a consumer discretionary stock. A lot of people don't realize by the way, there's not just a technology sector. Tech companies fall into several of these. But I just see so many headwinds, just can run down a few. Inflation is the buzzword of the day and that obviously can hurt consumer discretionary stocks, things like that. Things get more expensive, people spend less money, things like that. Also, you're going to see a big slowdown in disposable income. Student loan repayments are going to restart at some point. They've been pushed back like seven times. I don't want to say they're going to be restarting in May. But at some point, student loan payments are going to restart. The expanded child tax credit that has been sending Americans checks has not been renewed yet, so those checks not coming. I just think there's a lot of headwinds in discretionary retail that are going to play out throughout 2022 and I'm staying away from the space.

Jason Hall: Yeah. The big one there for me is the inflation story and the potential implications for continued supply chain stress, all of that inflows of cash we're talking about. We've already seen, I looked at some data earlier this month, looking at savings rates and personal savings balances. Guys, we're basically back to where we were at the end of 2020. There's not this massive amount of money that regular people have in their bank account anymore that they're ready to spend. We're basically back where we were and everything costs more. That is a perfect storm for this sector to not be a great place to invest. Matt, I agree there's going to be winners there. Because you look at Amazon. This has actually not been a great performing stock, but I think over the next several years, because so much of its business is not just about people buying stuff off of Amazon's website, but it's about all the other technologies they built. The growing ad revenue business, web services continuing to drive money, and then, oh, by the way, a lot of people will buy stuff from them because you can get things pretty cheap off of their website.

Frankel: Dan, do you have any thoughts on consumer discretionary before we move on.

Dan Caplinger: Just I think that the consumer still has a little bit of power here and then they've gotten used to that mindset of I had to go without during the worst of the pandemic, maybe savings are back to where they were ended 2020. I think that will probably overshoot to the other side. I think that means we probably get a decent performance in business metrics in the first half of 2022. Maybe where it really starts to fall off the cliff is toward the later part of the year. That's when we will see whether consumers have managed to keep up their share. If higher wages persist, if labor shortages helped out general consumers, if that sticks around and consumer discretionary has a chance, but they've had huge tailwinds from stimulus, from the government and from low interest rates, making it easy to get access to credit. You take that away. I think it's a headwind and we will see whether it's enough to offset things.