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Schwab Sector Views: Cracks in the Consumer Picture?

Key Points
  • A healthy American consumer is often cited as the reason a potential recession remains a low possibility in the near future. 

  • History has shown that by the time some popular consumer-related economic readings have definitively turned negative, a recession is already in place.

  • There appear to be some cracks forming that should be paid attention to—they could be nothing to worry about, but they could be a canary in the coal mine. 

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. 

Listen to the latest audio Schwab Sector Views.


The American consumer

As recession discussion increases due to the inverted yield curve and signs of weakening manufacturing activity, many on Wall Street—including us—have pointed to the strength of the American consumer as a main factor in keeping the U.S. out of a recession in the near term. And there’s no doubt that the American consumer is a vital part of the economic picture. According to a study from the St. Louis Federal Reserve, personal consumption expenditures make up just over 70% of U.S. gross domestic product (GDP), while accounting for roughly 80% of GDP growth. Keeping track of the state of the consumer is important not only for sector selection, but also for determining the state of the overall economy.

On the surface, things look quite good for the consumer. Unemployment remains at a historically low level of 3.7%, according to the Labor Department, while the more forward-looking weekly initial jobless claims data also is plumbing historically low levels. Consumer confidence remains elevated and wages are trending higher.

The jobs picture looks good…

Weekly initial jobless claims w recessions

…and wages are trending higher…

AHE YoY %-change, annualized, 3-mo MAV w recession bars

…while confidence remains high. 

consumer confidence w recession bars

So what’s to worry about? A couple of things first about the above data: As you can see, the levels of all of those readings were quite positive, before largely reversing as or after the recession was in place. Historically, the negative trend in the above numbers was established only once a recession was already underway. 

So what can we use to try to jump on a potential change in trends in these readings—and therefore the health of the American consumer? As our Chief Investment Strategist Liz Ann Sonders likes to say; “When it comes to the relationship between economic fundamentals and the stock market, better or worse matters more than good or bad.” 

 After thinking about this for a while and looking through some charts, it seemed to me that we may be able to get some potential clues from the upper-income members of society. Higher earners and those with greater net worth, it seems to me, may have more forward-looking insight into the state of the economy, as they are often the ones making hiring and firing decisions, while also making capital expenditure and investment decisions for companies they run or for which they are involved in decision-making. And their view on their potential business prospects may be reflected in some actions in their personal lives. This isn’t going to yield us any definitive answers, but could provide some advance indication of potential problems. 

The first thing that caught my attention was the divergence in performance of retail-related stocks depending on whether they target the upper-income consumer or the rest of the American public. Of course there are many things that can affect a stock’s performance, and this in no way should be construed as an opinion on these stocks, but more an interesting development that warrants our attention. As you can see, stocks of retailers that are more associated with the upper income consumer, such as Nordstrom’s, Ralph Lauren and Movado have suffered as of late, while retailers associated more with the broader consumer, although upper income folks also likely frequent these stores as well, have performed better. 

Higher-end retailers have underperformed

luxury vs general merchandise retailers YoY

Digging a little deeper into the upper-income world is recent data from Redfin, a real estate brokerage, and reported on by CNBC—where many of you may have seen it. The data showed that sales of homes listed at $2 million and above fell 16% in Q1 year-over-year, the largest annual decline since 2010. Additionally, the supply of these homes rose 14%—the fourth straight quarterly annual increase in inventory. Finally, the average price of a “luxury” home—defined by Redfin as the top 5% prices homes in the 1,000 cities it tracks, fell 1.6% to $1.55 million, while non-luxury home prices rose 2.7% to $300,000. There could certainly be other reasons for the slowdown in the luxury market, such as the change in the tax law that capped deductions for state and local taxes, as well as the reduction in the mortgage interest allowable from interest on mortgages up to $1,000,000 to $750,000. However, it could also point to lack of confidence in the upper-income consumer to make a larger purchase at this point. 

And while people at many income levels can purchase recreational vehicles, for most it’s likely more of a luxury purchase, rather than a need, and may skew toward upper-income folks. According to the RV Industry Association, shipments of recreational vehicles to dealers have fallen roughly 20% this year, after a 4.1% drop last year. And as you can see, a drop in RV sales has tended to precede broader economic slowdowns in recent history, before recovering toward the end of a recession. 

RV sales are slowing

RV sales YoY

Finally, back to the broader consumer outlook, we had an interesting divergence in consumer confidence indicators, with the Conference Board’s reading remaining elevated but the University of Michigan’s sentiment reading taking a sharp move lower. As you can see, the directional divergence is rare—and such divergence always raises my eyebrows. One divergent reading doesn’t make a trend, but it is something to watch. 

Rare divergence worth paying attention to

consumer confidence vs U of M long term with recession bars

So what does it mean?

Does all this mean that the American consumer as a whole is about to roll over and a recession is inevitable? No. But to me it does warrant paying attention to, and raises a bit of a yellow flag regarding the future health of the consumer. It also fits and reinforces in my mind the suggestion I gave in this space last time—refrain from making any large sector bets, as uncertainty remains elevated, and use times when the overall market rallies and more-cyclical sectors typically outperform to add to defensive positions such as utilities, staples and health care as needed to bring positions up to at least a neutral level. And stay tuned, because things could change quickly given what we’ve seen of late!

Schwab Sector Views: Our current outlook


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 09/10/19

Communications Underperform 09/28/2018 10% 23.83%

Consumer discretionary





Consumer staples















Health care










Information technology










Real estate










S&P 500®  Index (Large Cap)





Source: Schwab Center for Financial Research--as of 08/31/19


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.

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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. Supporting documentation for any claims or statistical information is available upon request.

All expressions of opinion are subject to change without notice in reaction to shifting market or 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 and rebalancing strategies do not ensure a profit and do not protect against losses in declining markets. Rebalancing may cause investors to incur transaction costs and, when rebalancing a non-retirement account, taxable events may be created that may affect your tax liability

All corporate names and market data shown above are for illustrative purposes only and are not a recommendation, offer to sell, or a solicitation of an offer to buy any security. Supporting documentation for any claims or statistical information is available upon request.

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 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 University of Michigan Consumer Sentiment Index is a consumer confidence index published monthly by the University of Michigan. The index is normalized to have a value of 100 in December 1966.

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

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