Schwab Sector Views: Sectors and Politics

Schwab Sector Views is our three- to six-month outlook for 11 stock sectors, which represent broad sectors of the economy. It is designed for investors looking for tactical ideas. We typically update our views every two weeks.

We normally try to stay away from the political sphere, as the effects of political changes on the stock market are generally fleeting. But these are extraordinary times—President-elect Donald Trump has been inserting himself into areas of the market like no other president in history.

Investors should remember that these are still early days, though. The moves we’ve seen in the market have mainly been in anticipation of what may happen after the changing of the guard is complete. The incoming administration has yet to make any changes to the regulatory environment. And although 115th Congress has been sworn in, it has yet to pass any new laws.

So with Inauguration Day just around the corner, we thought it would be a good time to discuss which sectors have been most affected by political issues—and how durable those effects are likely to be. As we’ve seen many times in the past, the plans of politicians often flounder in the face of political reality.

What we've seen so far

The one tangible impact of the election of Trump and a Republican Congress we’ve seen so far has been an increase in interest rates and a steepening of the yield curve.

Yields have shifted higher—helping financials

Source: FactSet, Federal Reserve. As of Jan. 9, 2017.

Higher rates have helped fuel a run in the financial sector. As have hopes for a rollback of some of the regulatory burden on the financial sector. While we believe that the recent run can't continue at the same pace and that a pause or even a pullback is likely, we also believe that the potential policy changes behind the market's hopes for the financial sector are the most likely to come to fruition. The president has a lot of power to make changes to the regulatory environment, whether through executive actions or personnel changes in rulemaking positions. Therefore, we think the risk of major policy disappointments in this area is relatively low, and we are maintaining our outperform rating for the financial sector.

Conversely, we believe the fears of a trade war, while not completely unfounded, are a bit overblown and have impacted the tech sector beyond what's warranted. Mr. Trump has noted many times, including in his book, "The Art of the Deal," that negotiations often involve an over-the-top opening salvo, with hopes of eventually moving the other party closer to his side. There is a risk that other countries may not want to give as much as the president-elect asks, raising the possibility of a trade war, but we believe it is more likely that some sort of mutually beneficial middle ground can be found. At the same time, we believe the tech sector could benefit from corporate tax reforms that make it easier for businesses to repatriate overseas earnings. This group draws more than half its revenue from overseas, according to Bloomberg, so there have been concerns about the strong dollar eroding returns. Allowing them to bring more of those earnings home could offset some of the effect. That's why we are comfortable leaving our outperform rating on the tech sector, though we're watching developments carefully.

Finally, we come to the elephant in the room…health care. The health care sector has struggled since the election, despite hopes that the new mix in Washington will be less likely to impose price controls on drug-makers and seems likely to repeal the Affordable Care Act (ACA), which has seen insurers leaving the so-called exchanges due to mounting losses according to The Wall Street Journal. The question is: What comes next? The "replace" portion of Republicans' calls to "repeal and replace" the ACA is still undefined, and whatever comes next will need at least some Democratic support if it is to garner filibuster-proof support in the Senate. Which provisions of the ACA may stay in place and which will go, and what the system will look like are uncertain at this point. And investors hate uncertainty. We are inclined to be cautiously optimistic regarding the future of the health care sector as a move toward more private-sector involvement and less government control would be a positive in our view—but we aren't sure what the ultimate outcome will look like. We'll be analyzing any proposals that emerge but for now we are keeping a neutral rating on the sector, which is a good place to watch from.

There are many other issues that could be addressed, but we think these three are the most note-worthy for investors. And with Trump making potentially market-moving statements on a nearly daily basis, it seems certain that there will be many more discussions of political issues in this publication—so check back often!

Schwab Sector Views: Our current outlook

Sector

Schwab Sector View

Date of last change to Schwab Sector View

Share of the
S&P 500 Index

Year-to-date total return as of 12/06/2016

Consumer discretionary

Marketperform

07/17/2014

12%

2.67%

Consumer staples

Marketperform

05/07/2015

9%

-0.61%

Energy

Marketperform

11/20/2014

7%

-1.87%

Financials

Outperform

05/07/2015

15%

0.87%

Health care

Marketperform

12/13/2012

14%

3.77%

Industrials

Marketperform

01/29/2015

10%

1.00%

Information technology

Outperform

04/29/2010

21%

2.61%

Materials

Marketperform

01/31/2013

3%

1.95%

Real estate

Marketperform

09/01/2016

3%

0.18%

Telecom

Underperform

09/12/2013

3%

-1.19%

Utilities

Underperform

05/23/2013

3%

-1.13%

S&P 500®  Index (Large Cap)

 

 

 

1.40%

Source: Schwab Center for Financial Research and Standard and Poor's as of 12/30/2016.

Clients can use the Portfolio Checkup tool to help ascertain and manage sector allocations.

What is Schwab Sector Views?

Schwab Sector Views is our three- to six-month outlook for 11 stock market sectors, which are based on the 11 broad sectors of the economy.

The sectors we analyze are from the widely recognized Global Industry Classification Standard (GICS) groupings. After a review of risks and opportunities, we give each stock sector one of the following ratings:

  • Outperform: Likely to perform better than the rest of the market.
  • Underperform: Likely to perform worse than the rest of the market.
  • Marketperform: Likely to track the broad market.

How should I use Schwab Sector Views?

Investors should generally be well-diversified across all stock market sectors. You can use the Standard & Poor's 500 allocations to each sector, listed in the chart above, as a guideline.

Investors who want to make tactical shifts in their portfolio can use Schwab Sector Views' outperform, underperform and marketperform ratings as a resource. These ratings can be helpful in evaluating and monitoring the domestic equity portion of your portfolio.

Schwab Sector Views can also be useful in identifying stocks by sector for potential purchase or sale. When it's time to make adjustments, Schwab clients can use the Stock Screener or Mutual Fund Screener to help identify buy or sell candidates in particular sectors. Schwab Equity Ratings also can provide an objective and powerful approach for helping you select and monitor stocks. 

Next Steps

Talk to Us
To discuss how this article might affect your investment decisions:
-          Call Schwab anytime at 877-338-0192.
-          Talk to a Schwab Financial Consultant at your local branch.

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