Consumer Discretionary Sector Rating: Marketperform

What is the consumer discretionary sector?

It includes automotive, household durable goods, leisure equipment, textiles and apparel, hotels, restaurants, and consumer retailing and services.

Consumer discretionary is—unsurprisingly—one of the more cyclical sectors. As the name implies, it’s dominated by companies that produce products and services that consumers often do without when they are under financial stress or worried about their job security, such as new clothes, new cars or entertainment. The sector has a number of industries with a fair amount of exposure to China—such as hotels & leisure, autos & auto components, and apparel. However, those industries make up a relatively small weight in the sector, which also includes internet retail. 

Despite the overconcentration of internet companies in the sector and a weakening sales outlook, we judge the fundamentals to be positive for the Consumer Discretionary sector, as some of its core underpinnings remain upbeat. While revenue growth in the sector is being driven in large part by the internet sub-industry and may be softening, return on equity (ROE) is more evenly dispersed across the sector and has been among the highest of all of the sectors recently. This has historically been a long-term tailwind for the various sectors.

The valuation factors we assess are also neutral for the sector, as an average of multiple indicators ranks Consumer Discretionary in the middle of the pack. In terms of relative strength, momentum is leaning positive for the sector.
For now, the macro environment is not providing a compelling enough rationale to label the macro factor landscape as anything but neutral for the Consumer Discretionary sector. 

Sector Overview: Consumer Discretionary is positive on Fundamentals and Relative Strength, neutral on Value and Macroeconomic factors

Note: Each of the sector lenses shown above—Macroeconomic, Value, Fundamental and Relative Strength—is both intuitive and evidenced-based in nature. Within each, there are a varying number of factors. The 
Macroeconomic lens includes sector sensitivities to interest rates, stocks and the value of the U.S. dollar; the outlook for each of these is determined by the Schwab Center for Financial Research (SCFR)’s Asset Allocation Working Group, which uses a mosaic approach of quantitative and qualitative considerations. Value includes six different valuation metrics that provide a holistic perspective on current valuations relative to each of the sectors’ own historical valuations, as well as relative to the other sectors. Fundamental provides insight as to how efficiently the companies within each sector use invested capital to produce earnings; this historically has been informative as to future relative performance of the sectors. Finally, Relative Strength measures momentum of the individual sectors against all of the other sectors. We also consider the data in the context of factors outside the scope of these indicators—for example, geopolitical risk or central bank policy changes.  

Source: Charles Schwab, as of 2/17/2020