Schwab Sector Views: How and Why?

Schwab Sector Views reflect a three- to six-month outlook and are appropriate for investors looking for tactical ideas. We typically update our views every two weeks so check back often for the most recent view

Questions arise from time to time how we come up with our sector recommendations and why we stick or change our views in certain instances.  Most of the time these questions come out of genuine curiosity, occasionally they are dripping in sarcasm that indicates we must be using a dartboard.  Let me assure you a dartboard is not used, but it's important to understand first how our recommendations are intended to be used.

Although they are for tactical positioning, they are not intended for rapid trading and catching every nuanced sector move that may occur.  We look for trends we believe will develop over the next 6-12 months, understanding, and often explaining, that it won't always head in the direction we predict.  Of course there are times where we are ultimately wrong on the call, but there are also often occasions where short-term movement are against us, but the ultimate call ends up being correct.

We use both bottom up metrics, such as earnings, valuation, balance sheet health, etc, combined with top down analysis of economic and broad corporate trends in order to come to our conclusions.  We analyze what the risk/return profile is, in our view, and where it stands on the appropriateness for the vast majority of our clients.  For example, health care, which had done quite well over the past year up until the last few weeks, was a group we stayed neutral on.  Although we repeatedly wrote about our belief in the upside potential for the group, we believed the risks from the regulatory and political fronts were too great for us to be more aggressive.  Through the individual sector write-ups, we try to explain the reasoning behind all of our calls, so investors can evaluate the reasoning behind our decision and make their own decision whether to take action or not.

Our current calls are an excellent example of the patience that is sometimes required.  We continue to have a more cyclical bent to our calls, largely hinging on our belief in an improving economy.  But we also warned there would be some bumps along the way, as profits from last year were taken from sectors such as the discretionary group.  However, given our time frame reference above, we believe these moves weren't worth chasing and the longer-term trend would be reestablished relatively quickly, resulting in our recommendations staying the same, but taking a slight hit as of late. We are now seeing solid signs of the more cyclical sectors reestablishing themselves as the economic data improves, but should that falter again, we would likely look to make a change at that time.

As always, we strongly suggest looking for more details on all of our specific sector views and information on our outperform and underperform ratings by reading the expanded analysis below, and then making adjustments to portfolios as you see fit. One final note: Our tactical recommendations change quickly at times as we continually monitor economic progress and factors influencing individual sectors, so check back often.

As a client, you can use the Portfolio Checkup tool to help ascertain and manage your sector allocations.

 

Sector

Schwab Sector View

S&P 500 benchmark weight

Date Sector View last changed

Year-to-date return as of 04/09/2014

Consumer discretionary

Outperform

12%

09/12/2013

- 2.85

Consumer staples

Underperform

10%

05/23/2013

1.38

Energy

Marketperform

10%

05/12/2011

1.74

Financials

Marketperform

16%

12/13/2012

1.38

Health care

Marketperform

13%

12/13/2012

5.28

Industrials

Outperform

11%

05/23/2013

0.46

Information technology

Outperform

19%

04/29/2010

2.44

Materials

Marketperform

4%

01/31/2013

3.45

Telecom

Underperform

2%

09/12/2013

1.94

Utilities

Underperform

3%

05/23/2013

11.26

S&P 500®  Index (Large Cap)

 

 

 

1.87

Source: Schwab Center for Financial Research and Standard and Poor's as of April 8, 2014.

Consumer discretionary: Outperform

Rough weather to start the year had an impact on the consumer but we believe it was relatively short-lived and that pent up demand will help to push the consumer discretionary sector higher over the next several months, leaving us with our outperform rating in place. We expect to see signs of economic improvement over the next month or two, but if we don't, our outperform rating would likely be in jeopardy.

The American consumer seems to consistently top diminished expectations and show a remarkable resilience in the face of obstacles.  Headwinds certainly remain and one thing we're watching is the increased cost of some core food-related commodities.  We're skeptical the majority of these costs will be permanent but it could impact discretionary income if sustained. But to this point the consumer has largely taken these issues in stride, while it appears retailers have been able to manage inventories and keep costs in check.

And the fundamental picture seems to be improving as we've seen some of the larger headwinds facing consumers dissipate somewhat.  Consumers have reduced their debt load, housing has strengthened, auto sales have improved, and the job market improvement appears to be accelerating to a modest degree, despite some apparently weather-related dips as of late. Finally, we believe energy prices that had been pushed higher by increased demand due to severe weather and geopolitical tensions will start to come down, helping bolster the discretionary income of consumers.

We have long acknowledged the American consumer has shown a remarkable ability to overcome obstacles, and despite some near-term bumps are maintaining our outperform rating on the discretionary sector.

Clients can see our top-rated stocks in the consumer discretionary sector.

Positive factors for the consumer discretionary sector:

  • Inventories remain relatively lean. This should provide retailers with some pricing power as activity picks up.   
  • The Federal Reserve continues to be quite accommodative, despite modestly pulling back on quantitative easing, which could help to support the consumer.  
  • Global central banks in developed markets appear to be firmly in an easing stance, which could help bolster the consumer.  
  • The job market, although still somewhat sluggish, appears to be improving at a steady rate, with recent weaker jobs numbers likely aberrations.

Negative factors for the consumer discretionary sector:

  • Credit standards remain tight, although there are signs of easing.  
  • Uncertainty and increased costs surrounding the Affordable Care Act could dent consumers' ability and willingness to spend. 
  • Fierce competition in the retailing space appears to be impacting margins, which could grow into problems for stock performance if it gets too severe. 

Return to top

Consumer staples: Underperform

We to believe underperformance is the most likely near-term course for the staples group as US economic data continues to indicate growth and investors look to boost return potential and move out the risk spectrum to some degree. We want to note, however, that despite the downturn in the overall market to begin the year, the staples group did not perform in its traditional defensive way. If economic expectations were to deteriorate substantially, that would likely change, but we don't believe that's the most probable course, leaving us relatively confident in our current rating.

Although a consumer group, in contrast to the discretionary sector, the staples group is considered defensive because it tends to sell items that will be purchased regardless of the economic environment, such as toilet paper and laundry detergent. While this is a positive during tough economic times, it can also be a negative during times of improving economic conditions as consumers don't typically expand their spending on such items as the economy improves—demand tends to stay relatively constant. And with the economic outlook showing signs of brightening further, the more defensive group could continue to be in for a bit of a rough ride.     

Additionally, staples companies typically deal with relatively narrow margins, which can make it difficult to rapidly increase profitability and thus support swift growth in stock prices.

Clients can see our top-rated stocks in the consumer staples sector.

 

Positive factors for the consumer staples sector:

  • Staples retailers have aggressively cut costs and are attempting to create more perceived value for consumers, which could support sales.
  • The defensive consumer staples group could benefit from tighter consumer wallets if consumer confidence takes an unexpected hit.

Negative factors for the consumer staples sector:

  • Competition continues to accelerate and is exacerbated by the increasing emergence of low-cost, emerging market production, which could potentially cause pricing power in the group to evaporate by compressing margins and squeezing earnings.
  • An acceleration of economic growth would likely cause the staples sector to underperform. 
  • Numerous central banks are now firmly in easing mode in an effort to stimulate the economy, which could hurt the more defensive sectors.

Return to top

Energy: Marketperform

Oil prices again were temporarily influence by geopolitical concerns, which have since calmed down somewhat, allowing oil to ease. We believe this will help the energy sector stabilize after having modestly underperformed the overall market over the past couple of months, although volatility in the sector is always possible, resulting in largely marketperformance. We have seen some of that increased volatility in the natural gas market as cold weather has caused demand to surge.  We believed this was a relatively short-term phenomenon and advised investors not to chase it higher and prices have indeed eased, illustrating some of the dangers of chasing short-term moves.

Energy, and especially crude oil, tends to have a large speculative element which can make it difficult to focus on the underlying fundamentals, but we believe that's exactly what investors should do.  Although there are likely to be many twists and turns, we believe it ultimately comes down to supply and demand factors, influenced largely by the global economic outlook. And right now, the Fed continues to be quite accommodative, notwithstanding the continuing tapering process for quantitative easing, but global growth appears to be somewhat in question, with emerging markets largely under pressure as of late. Additionally, improved supplies and still modest demand growth lead us to a relatively balanced picture that we believe will result in performance roughly inline with the overall market. 

We believe the US and Chinese economies will ultimately drive the direction of the sector. To that end, China's near-term response to its economic softening had been almost nonexistent and leadership appears to be more concerned with longer-term structural issues than short-term growth. Alternatively in the US, the Federal Reserve has been extremely aggressive, but its effectiveness appears to be diminishing as time goes on. 

Moving past the short-term movements in the energy markets, economic developments are somewhat difficult to gauge, and we are watching them closely.  The US economy hit a soft patch, that we believe that was temporary and we are starting to rebound, Japan's recovery is at least stalling, and Europe's economic situation continues to be in question but there are signs that the economy is turning around.  We believe economic growth in the developed world, including the US, will accelerate in coming months, but we are watching incoming developments closely.  Additionally, there is also an increase in domestic production that could bring prices lower as US supplies of energy products build.

Longer term, we have a mainly positive outlook for the energy sector and believe an upgrade opportunity may present itself in the not too distant future. Developing and emerging countries will almost certainly continue to need more fuel, demand will likely continue to grow but we also note that supplies are increasing as well leaving us with a relatively neutral view for at least the time being.

Clients can see our top-rated stocks in the energy sector.

 

Positive factors for the energy sector:

  • Developing nations will likely need more energy as they improve their infrastructures and modernize their economies.
  • Global central banks in the developed world appear to generally have an easing bias, which could help the more cyclical sectors such as energy.

Negative factors for the energy sector:

  • Supplies could increase dramatically with a renewed commitment to exploration and technological improvements. We've already seen new discoveries and existing fields produce more oil than originally projected.
  • Conservation efforts and new technology could impact the growth in demand for energy products.
  • Severe pollution problems in China could result in mandates to cut energy use. 

Return to top

Financials: Marketperform

The financial world continues to be in focus with new questions arising that could strain investors' confidence in at least some of the group.  But despite the recent hubbub, the sector has outperformed as of late, overcoming some early year weakness and now performing roughly inline with the market, which is one reason why we're sticking with our marketperform rating.

There are still risks for the group, although we believe the sector's fundamentals and broader macroeconomic developments help to offset some of those risks. A still accommodative Fed provides financial companies with low borrowing rates on money that they can potentially then lend out at higher rates.  And although the spread isn't historically large, the possibility for longer-term interest rates to continue to move higher, while the short end remains anchored by the Fed provides the opportunity for margin expansion. Also, balance sheets of consumers and companies appear to be improving. Corporate cash balances are high and household debt as a percentage of disposable income for consumers has fallen. This has enabled banks to gradually reduce the reserves on their balance sheets for loan losses. And the continued, although slowing, improvement in the housing market should, in our view, bolster financials as they are able to get foreclosed homes off their balance sheets more quickly, although mortgage demand had softened due to the increase in rates toward the end of last year.

We still have concerns, and chief among them is the regulatory environment. Regulations that limit trading financial institutions can do for themselves, which has been a major profit driver for some companies, remain a concern for us. And already-instituted new capital requirements restrict the amount of money banks can lend, limiting profit potential for many of them. Additionally, uncertainty remains over the impact of Dodd-Frank regulations that have been decided on, while there are still more decisions to come.  Finally, due to the recent publicity, more regulations could be coming in the near future, which to some extent may be useful and needed, but we often see an overreach in situations like this.

We maintain relative confidence in the ability of the financial industry to reshape itself and adjust to the changing environment as it has done so many times, but are watching developments in Washington carefully to determine what our next move may be.

Clients can see our top-rated stocks in the financials sector.

 

Positive factors for the financials sector:

  • Most financial institutions have paid back government loans and are increasing share buybacks and dividend payments, illustrating their growing health and stability.
  • Recent delinquent loan estimates have decreased among credit card companies, indicating improving balance sheets.
  • Lending standards have loosened somewhat, which could help loan volume grow.  
  • Businesses could increase borrowing, as they take advantage of low rates and look to spend on projects they’ve been . postponing in light of economic and fiscal uncertainty.

Negative factors for the financials sector:

  • Rising interest rates could dampen demand for mortgages, which could impact profits in certain areas of the financial sector.
  • Government intervention, such as new limits on certain fees that can be charged, has already started to affect the financial industry and could hold back performance for the foreseeable future.
  • A new round of foreclosure uncertainty or a push by the Federal government to again loan to higher risk borrowers could pose problems for the financial sector.  

Return to top

Health care: Marketperform

We've liked the health care sector for some time as the fundamentals of the group have remained attractive to us but admit to missing a good move in the group as we remained concerned about the uncertain political environment and the area continues to face political headwinds, leading us to maintain our marketperform rating. Health care continues to be at the center of much political discussion.  However, implementing the numerous provisions of the Affordable Care Act still remains under debate and seem to change on a relatively frequent basis—causing some additional volatility in the group. Additionally, we've seen some recent underperformance as some of the high-flying biotech names were hit over concerns we have noted for some time as Congress threatened to look into the pricing of some drugs.

Containing costs remains a high-profile issue and increased government involvement could mean a more challenging environment for at least some of the space. Until we get a better handle on what impact the current negotiations have on the economy as a whole and the health care sector specifically, we believe a marketperform rating is appropriate.

But it's also important to remember that the political aspect is only one piece to the puzzle and that investors should also look to the overall fundamental picture. In our view, these fundamentals look good as valuations appear okay despite the recent run, balance sheets are solid, the group has good dividend yields, and the overall cost structure appears to have been much improved. And while the fight in Washington is largely on how to pay for health care, there seems to be little debate that there is an increasing demand for health care products and services, which is typically a good sign for an industry.

Finally, we believe the health care sector provides both growth and defensive characteristics, which can be attractive to investors.

Clients can see our top-rated stocks in the health-care sector.

 

Positive factors for the health-care sector:

  • The aging population could provide a boon for the industry as an increasing number of Americans require more extensive drug treatments and medical care.
  • Americans are increasingly obese, which results in a greater need for medical attention due to the myriad of health issues that coincide with obesity.
  • Balance sheets in the health-care sector remain flush with cash, boosting the possibility of higher dividend payments, share-enhancing stock buybacks, and mergers and acquisitions.

Negative factors for the health-care sector:

  • Government regulation will likely continue to increase during the coming years as an aging population demands intervention in order to theoretically lower their out-of-pocket health-care costs.
  • Pricing regulation potential concerns have recently weighed on the biotech industry and could continue should worries escalate.
  • The current and fiscal situation in Washington creates continued uncertainty regarding the group. 
  • Biotech stocks have been hit by concerns over increased government scrutiny of drug pricing, which illustrates some of the regulatory threat existing.

Return to top

Industrials: Outperform

Although the global manufacturing picture still appears a bit murky, we continue to believe in our recommendation on the group of outperform. The national ISM Manufacturing Index remained in territory depicting expansion and moved higher in the last reading.    Additionally, Europe remains weak but there are some encouraging signs as governments appear to be shifting off some of the more onerous austerity policies that could help to boost growth and the ECB may become more aggressive, although Japan's situation appears to be stalling. This somewhat disjointed, but potentially improving picture leads us to believe that an outperform rating is appropriate.

We have concerns, but they are slowly being balanced out as Europe is apparently out of their recession and has made progress on their debt crisis, despite recent flare-ups, China's growth is slow relative to history but they appear to be making structural improvements, India's bureaucracy remains troubling although there are nascent signs of reform, and US political concerns appear to have lessened as a budget agreement was reached, likely taking the possibility of another government shutdown off the table.  We believe corporations have been cautious, but the investment picture appears to be brightening.

We also continue to watch fiscal austerity measures around the world, which could dampen growth in the industrials arena, but as mentioned above do appear to be dialed down at least somewhat, painting a potentially positive picture for industrial stocks.

Clients can see our top-rated stocks in the industrials sector.

 

Positive factors for industrials:

  • Corporate balance sheets remain relatively cash rich, which could help push management to invest in new, more-efficient equipment to help offset production losses due to layoffs.
  • Lending standards, while still tight, have started to loosen, which should help boost capital spending. 
  • Inventories in much of the manufacturing area appear relatively low, leading to the possibility of a demand-inspired rebuilding phase.  
  • Countries are now considering undoing some of their more stringent austerity-related policies, which could help to boost economic activity and demand for industrial goods.

Negative factors for industrials:

  • Access to credit remains limited in many cases—among smaller businesses, for example—which tends to dampen spending plans.
  • Fiscal austerity, if maintained, could result in slower economic growth and decreased demand for industrial products.

Return to top

Information technology: Outperform

We've seen signs of a perk up in the relative performance of the tech sector, and we continue to believe that the sector is poised to outperform. The innovation and entrepreneurial spirit that seems to pervade the tech sector are factors that are sometimes difficult to quantify but make us excited about the future of the sector and help us to have an outperform view on the group.       

With large cash balances, increasing dividend payments, solid management in many cases and tight inventory controls, the tech sector appears far more stable than it was in the late-1990s environment that so many still remember. We've been touting this stability as one of the reasons to stick with the group and in fact the sector has outperformed during the past couple of downturns in the market, including the most recent one.

The fundamentals of the group also appeal to us. Companies that have underinvested in technological improvements during the past couple of years appear to be at the point where they need to upgrade equipment. Such investments are typically attractive because they tend to increase companies' efficiency and productivity at all levels.

As a result, companies can produce more with fewer workers—which allows them to cut back on costs and potentially expand margins.

Additionally, balance sheets in the sector appear solid, with large cash balances and relatively low debt. This enables the group to increase dividends and pursue mergers and acquisitions that might help performance as competition is removed and expenses consolidated. We believe this also helps provide stability to the group, which in turn gives it a certain level of defensiveness mentioned above, contrary to its high-beta history.

Clients can see our top-rated stocks in the information technology sector.


Positive factors for information technology:

  • Growth in business investment in technology is now outpacing growth in total business investment.
  • Real tech investment has been below trend for several years, which could bode well for the future of the sector as spending returns to more normal levels.
  • We're starting to see banks loosen lending standards, which could slowly help revive capital investments.

Negative factors for information technology:

  • Increasing global competition, especially in areas with low labor costs, will likely continue to compress profit margins.
  • We see signs that companies remain hesitant to increase capital spending.

Return to top

Materials: Marketperform

The materials sector performance has improved modestly as investors seem to be recognizing the improving global economic picture we believe is developing. This is a trend we believe will continue and that marketperformance is the most likely course over the next several months. However, there is still uncertainty surrounding global economic growth with a still tepid at best European environment , Chinese growth that has slowed based on the past several years, and a likely stronger US dollar longer-term that dampens profitability from abroad. With aggressive responses from central banks and a reduction in austerity measures around the world having the potential to improve some of these issues, we are watching the materials group closely, but we continue to believe marketperform is the best place to be at the present time.    

Accommodative monetary policy, as we are now seeing in most developed of the globe, has typically been a positive for the materials sector as growth expectations increase. These actions have not resulted in a surge in growth so far, however, but we view these as signs that important central banks around the world are starting to come over to the Fed’s view of bolstering growth. Additionally, we are starting to see a new potentially positive phenomenon as some indebted governments have scaled back on their austerity plans, and are focusing a little more on generating economic growth. This could provide a bit of a tailwind behind the materials sector, warranting a marketperform rating, with an eye toward another upgrade should global improvement take hold.

Clients can see our top-rated stocks in the materials sector.


Positive factors for the materials sector:

  • Developing countries continue to need more natural resources to support their infrastructure building.
  • Global central banks in the developed world are now largely in easing mode, which should help to support economic activity and the materials sector.
  • Some austerity measures seem to be easing, which could help to stimulate growth.

Negative factors for the materials sector:

  • Chinese demand for processed commodities might be slowing as technological advances and a build-out of production facilities allow the country to produce more of its own materials. China recently transitioned from a net importer to a net exporter of steel.
  • Wage costs are rising in the materials sector as we’ve seen skilled labor shortages in certain segments of the market.
  • US dollar strength could undermine the results in the materials sector.

Return to top

Telecommunications: Underperform

Despite recent outperformance that we believe is quite temporary, the telecom sector remains concerning to us and we continue to rate the group at underperfrom.  The yield provided by the sector, and traditionally defensive nature of the group, can make it attractive to investors in an environment where income is difficult to come by.  But as we've seen, when interest rates start to rise, as we believe they will in the near future, the telecom sector could suffer.      

The telecom sector has lost some of its traditional defensive appeal, in our opinion, given that the group has moved much of its business model from the historically stable, regulated fixed-line business to the more variable, consumer-dependent wireless arena, while also dealing with an onslaught of competition from a variety of sources. And although consumers are increasingly demanding more wireless services, which could boost revenues, costs remain elevated due to large equipment upgrade expenses which could make profitability more difficult.

Generally, many investors apparently do still view telecom as defensive, seeing the remaining fixed-line business as a cushion against variable revenues in less certain times. Additionally, dividend yields in the space have been relatively attractive to income-hungry investors. But we are seeing wage costs, which had been under control, start to rise, while announcements of increases in capital expenditures could reduce margins, causing us some concern.

Competition for increasingly budget-conscious consumers remains fierce, and telecom certainly hasn't been immune to bargain-hunting shoppers, as evidenced by declining pricing power in the space. We're watching developments in this area especially closely given that new products still seem to be enticing consumers to spend, but we wonder how many times the sector can draw from that well.

In contrast to the technology sector, companies in the telecom sector have a lot of debt on their balance sheets, so we continue to view the group with caution as interest rates continue to rise, and we feel comfortable sticking with our lower rating on this group for the time being.

Clients can see our top-rated stocks in the telecommunications sector.


Positive factors for the telecommunications sector:

  • Wireless demand appears to be increasing as more communication and media devices move to the wireless arena, although some of that movement is likely to take away from fixed-line revenue.
  • The higher dividends typically paid by telecom companies have attracted investors tired of paltry fixed-income yields. But the yield advantage these companies have over the market appears to be diminishing as interest rates have crept higher.

Negative factors for the telecommunications sector:

  • Consumer spending on telecom compared to total spending is now falling, which has typically coincided with underperformance for the sector.
  • Net profit margins are declining for the telecom sector as competition squeezes margins.
  • Capital expenditures in the telecom space are rising as companies look to improve and expand their networks, which could be a burden on profitability in the near future.
  • The telecom sector has the highest debt-to-equity ratio of any nonfinancial sector. That could hurt the group in this time of tight credit.

Return to top

Utilities: Underperform

Recently, the downturn in interest rates appears to have contributed to some recent outperformance by the group, which we think will be a relatively temporary situation. We have been concerned about stock valuations in the utilities sector for some time as investors chased the relatively higher yields, and we cut the rating to underperform from marketperform. We continue to believe the most likely course for the utilities sector in the next several months is renewed underperformance.

The Fed appears to be attempting to make riskier assets more attractive through extremely loose monetary policy, which we believe will make the utilities sector increasingly unattractive to investors. Additionally, should interest rates continue to creep higher with stronger economic growth, the yield characteristics of the utilities sector may become less attractive, leading us to believe an underperform rating is most appropriate. 

Certainly, if the economic situation deteriorates, the utilities sector could benefit from a search for perceived safer assets. Additionally, an improving housing market could result in an increase in electricity needs in developing areas, and we're seeing signs that may be occurring as housing starts have started to creep higher. But we believe these potential positives don't outweigh our concerns and the sentiment shift among investors we believe is now occurring.

Clients can see our top-rated stocks in the utilities sector.


Positive factors for the utilities sector:

  • Dividend-paying stocks remain attractive as long as yields on conservative fixed-income products remain relatively low. And should economic prospects decline more than currently expected, defensive, dividend-paying stocks could become even more attractive. 

Negative factors for the utilities sector:

  • Utilization rates of electric and gas utilities have moved down modestly while production has spiked, indicating a potential oversupply issue that could pressure margins.
  • Capacity growth has been rising, which has been a sign of underperformance for the sector in the past.
  • Accelerating economic growth would likely make the defensive utilities sector less attractive.  
  • Interest rates should trend higher, making the yield-heavy utilities sector potentially less attractive.

Return to top

About Schwab Sector Views

Schwab Sector Views were developed by Charles Schwab & Co., Inc.'s ("Schwab's") Investment Strategy Council. Schwab Sector Views are Schwab's outlook on the 10 broad sectors as classified by the widely recognized Global Industry Classification Standard groupings. The GICS structure comprises sectors, industry groups, industries and subindustries. Schwab Sector Views are at the sector level. While Schwab Equity Ratings and Schwab Industry Ratings utilize a disciplined approach that evaluates all stocks (Schwab Equity Ratings) or all industries (Schwab Industry Ratings) in the same manner, Schwab Sector Views uses analytical techniques and methods that vary from sector to sector.

Explanation of columns in the table: The benchmark weights are provided for reference and represent each sector's market capitalization weight in its index.

Schwab Sector Views represent our current outlook on each particular sector. All investors should be well-diversified across all sectors. However, investors who want to tactically overweight or underweight particular sectors may want to consider our three- to six-month relative performance outlook reflected in this column. These views refer only to the domestic equity portion of investors' portfolios.

How should I use Schwab Sector Views?

Investors should generally be well-diversified across all sectors, at or near the respective sector market capitalization weights relative to the overall market (benchmark). However, investors who want to make tactical shifts to those weights with a goal of outperforming the overall market can consider the Schwab Sector Views as a resource. Schwab clients can also use the Stock Screener or Mutual Fund Screener to help identify buy and/or sell stock or mutual fund candidates in particular sectors that they may be underweighted or overweighted in their portfolios.

How to use Schwab Sector Views in conjunction with Schwab Equity Ratings

Sector diversification is an important building block in portfolio construction. Schwab Sector Views are expressed in terms of outperform, marketperform and underperform, and can be particularly helpful in evaluating and monitoring your portfolio composition. Schwab Sector Views can be useful in screening new stock purchases and in identifying portfolio holdings for possible sale. A review of sector weights coupled with individual stock concentration should be a critical measure of equity portfolio diversification. Schwab Equity Ratings provide an objective and powerful approach for helping you select and monitor stocks.

   Was this helpful?  

Subscribe:

Subscribe to Emails (clients only) Subscribe via RSS Download the On Investing® iPad® App

Important Disclosures