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Schwab Sector Views

Schwab Sector Views: ‘Tis the Season…Almost

Key Points
  • The status of the American consumer is vital to the overall economy, and the holiday season can go a long way to determining the fate of retailers.

  • Low unemployment, increasing wages, and high confidence among consumers paint a positive picture for both the holiday season and the overall economy.

  • The retail sector may not be as dire as you have been led to believe.

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.

*Due to the Thanksgiving holiday, the next version of Sector Views will be published on December 7, 2017.

Deck the Halls…almost! 

We won’t judge if your halls have already been decked, but regardless, we are entering a period that is historically vital to retailers.  The status of the consumer isn’t just important for how stores will perform; it is also central to how the overall economy will develop in the coming months.  Much of the U.S. economy arguably comes down to how the consumer is faring.  Businesses make hiring and investing decisions based on their expectations of consumer demand.  Oil companies in the energy space sell to consumers who drive cars and to businesses that transport and produce goods for the consumer. Health care companies provide medicine and services to consumers. Materials companies mine for elements that will go into products for consumers. The list goes on and on.  I don’t think it takes much to convince most people about the importance of the consumer, both during the holiday season and for the overall economy.  So where do we stand?

Looking good!

At this point in the economic expansion, it would be difficult to view the status of the consumer as anything less than mostly positive.  For sure, there are still problems, as some people are working at jobs they are overqualified for and wage growth has been slow to come around.  But with unemployment historically low, wages trending higher and still low interest rates conspiring to boost consumer confidence, the picture is looking pretty positive to us.

Historically low unemployment

Historically low unemployment

Source: FactSet, U.S. Dept. of Labor. As of Nov. 6, 2017.

Is helping boost wages

Is helping boost wages

Source: FactSet, Federal Reserve Bank of Atlanta. As of Nov. 6, 2017.

While consumer confidence is soaring

While consumer confidence is soaring

Source: FactSet, Conference Board. As of Nov. 6, 2017.

Are these confident consumers actually spending money?  Yes, though maybe not to the degree they would have in previous economic expansions.  Personal spending reported by the Commerce Department rose 1.0% in September, which was the largest monthly increase since August of 2009. Retail sales have also been increasing at a relatively steady rate, although there could have been some hurricane-induced volatility recently.

But the consumer does appear to be a bit more cautious in the expansion since the financial crisis in 2008, echoing stories of thrift heard after the Great Depression.  While that was a more prolonged and we would argue more serious event, the psychological impact appears to be somewhat similar—with both investors and consumer exercising a degree of caution following a major financial event. To this point, consumers haven’t loaded up on debt as they might have in the past and the savings rate has been modestly higher for an extended period following the crisis. There are indications that may be changing as the savings rate has declined as of late while the paring of debt appears to have leveled off.  These are indications to us that the rise in consumer confidence seen above may be starting to translate into greater spending by American consumers.

Debt obligations have declined, but are leveling off

Debt obligations have declined, but are leveling off

Source: FactSet, Federal Reserve. Includes mortgage and consumer debt, auto lease payments, rental payments,

homeowners insurance, and property tax payments. As of Nov. 6, 2017.

While the savings rate has declined

While the savings rate has declined

Source: FactSet, U.S. Bureau of Economic Analysis. As of Nov. 6, 2017.

Holiday cheer for the retailers?

Despite this apparent rosy picture of the consumer, stories about the struggles of retailers have been prevalent.  We’ve seen major retail names struggle and disappear in recent years, while every week seems to bring another story of trouble for traditional retailers. And I’m sure you’ve seen empty spaces in malls and strip centers as more store locations close. Citing data from market research firm IHL Group, in September, Forbes reported that over 10,000 stores are expected to close in 2017. (That could put a damper on holiday cheer!)  But the report also looks at the other side of the coin, and noting that over 14,200 stores are expected to OPEN in 2017. (Now there’s a stocking stuffer that you didn’t see coming.)  This churn seems to be higher than it has been in the past, and some of the most widely known names have garnered much attention for the troubles they are running into, but the picture for retail doesn’t appear to us to be as dire as might have been portrayed. In fact, we are seeing some signs that the trend toward online shopping, which some have predicted would kill brick-and-mortar retailers, may be leveling off a bit.

Online sales growth has trended lower, while department store declines have moderated

Online sales growth has trended lower, while department store declines have moderated

Source: FactSet, U.S. Census Bureau. As of Nov. 6, 2017.

And this holiday season could shape up to be a solid one.  The NPD Group released a September survey that showed a decreasing number of Americans planning to wait until the last minute to shop, which could help retailers maintain some level of pricing discipline.  Additionally, this year sports 32 days between Thanksgiving and Christmas, the second most days possible and Christmas falling on a Monday gives shoppers one last weekend to ring the register.  Holiday spending forecasts are notorious for being tough, and we aren’t going to give one, but we do think the picture entering the season is a positive one.  Does that mean you should run out and buy retailers?  At this point, we would say no.  Sentiment toward the group is terrible and seasonality data from Ned Davis Research shows that the consumer discretionary sector actually underperforms the market slightly during December, but solidly outperforms that market historically in the first three months of the year.

Of course, historical performance is no guarantee of future performance, but for those wanting to wade into a group that has been beaten up lately, we suggest looking at the retailers’ stocks as you’re browsing through their stores.  There are certainly risks, as we’ve seen, and due diligence is required as this will likely be some retailers’ last holiday season, but we believe there are some gems to be had by investors that are willing to do the appropriate amount of digging and can stomach the risk.  Remember, in order to buy low and sell high, you have to first buy low…and that doesn’t always feel good!

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 11/07/2017

Consumer discretionary

Marketperform

07/17/2014

12%

14.12%

Consumer staples

Marketperform

05/07/2015

9%

5.26%

Energy

Marketperform

11/20/2014

6%

-4.39%

Financials

Outperform

05/07/2015

15%

14.96%

Health care

Outperform

01/26/2017

14%

19.99%

Industrials

Marketperform

01/29/2015

10%

15.12%

Information technology

Outperform

04/29/2010

23%

39.34%

Materials

Marketperform

01/31/2013

3%

19.64%

Real estate

Underperform

01/26/2017-

3%

11.77%

Telecom

Underperform

09/12/2013

2%

-15.23%

Utilities

Underperform

05/23/2013

3%

17.46%

S&P 500®  Index (Large Cap)

 

 

 

17.64%

Source: Schwab Center for Financial Research and Standard and Poor’s as of 10/31/17.

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.

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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Important Disclosures

Schwab Sector Views do not represent a personalized recommendation of a particular investment strategy to you. You should not buy or sell an investment without first considering whether it is appropriate for you and your portfolio. Additionally, you should review and consider any recent market news.

Performance may be affected by risks associated with non-diversification, including investments in specific sectors. Each individual investor should consider these risks carefully before investing in a particular security or strategy.

All expressions of opinion are subject to change without notice in reaction to shifting market and other conditions. Data contained herein from third-party providers is obtained from what are considered reliable sources. However, its accuracy, completeness or reliability cannot be guaranteed.

Diversification strategies do not ensure a profit and do not protect against losses in declining markets.

Indexes are unmanaged, do not incur management fees, costs and expenses, and cannot be invested in directly. Past performance is no guarantee of future results.

The S&P 500 Index is a market-capitalization-weighted index comprising 500 widely traded stocks chosen for market size, liquidity and industry group representation.

The Global Industry Classification Standard (GICS) was developed by and is the exclusive property of Morgan Stanley Capital International Inc. (MSCI) and Standard & Poor’s. GICS is a service mark of MSCI and S&P and has been licensed for use by Charles Schwab & Co., Inc.

The S&P 500® Information Technology Index comprises those companies included in the S&P 500 that are classified as members of the GICS® Information Technology sector.

The Consumer Confidence Index is a survey by the Conference Board that measures how optimistic or pessimistic consumers are with respect to the economy in the near future

The Schwab Center for Financial Research is a division of Charles Schwab & Co., Inc.

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