Fundamentally, the state of the American consumer remains healthy—unemployment is near historical lows, wages have risen modestly, consumer confidence remains relatively high and interest rates have fallen this year, which makes borrowing cheaper.
However, the business cycle—which traditionally rotates through early/mid/late stages, then recession, before starting the cycle over again—appears to be in the late stages. Historically, this has been a relatively weak point in the business cycle for the Consumer Discretionary sector, which tends to outperform in the early stage.
Also, new U.S. tariffs scheduled to take effect on Chinese goods later this year will have a greater effect on consumer goods than previous tariffs did, which may increase consumer prices, in turn hurting sales and pressuring profit margins within the Consumer Discretionary sector.
Meanwhile, the spending mix is shifting, with online sales growing much faster than traditional department store sales,¹ while consumers also have shifted their spending habits relative to what they were before the Great Recession. In addition, price competition has created a tough environment for many retailers, paring weaker performers from an overcrowded space.
Overall, the American consumer’s mood is optimistic, but we’re on guard for a potential softening of that mood if business leaders’ cutbacks on capital spending broaden into cutbacks on labor. Some recent purchasing managers’ index (PMI) data have shown some labor market deterioration within the services sector, following what had been weakness concentrated in manufacturing. This is an important factor to watch to see if a trend develops. For now, we maintain our marketperform rating.
¹ Source: U.S. Department of Commerce, Quarterly Retail E-Commerce Sales, 2nd Quarter 2019, reported 8/19/2019.
What do the ratings mean?
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 broader stock market*
- Underperform: likely to perform worse than the broader stock market
- Marketperform: likely to track the broader stock market
Want to learn more about a specific sector? Click on a link below for more information or visit Schwab Sector Views to see how they compare. Clients can log in to see our top-rated stocks in the Consumer Discretionary sector.
* As represented by the S&P 500 index
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