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Schwab Sector Views: Uncomfortably Neutral

Key Points
  • The second-half sector outlook begins the way the first half did—with health care at outperform and communication services at underperform. 

  • Patience can be frustrating, but may be the most prudent course of action, especially during periods of heightened uncertainty, like now.

  • A more-defensive posture is appearing to be appropriate given the weakening economic data, but elevated valuations keep me from pulling the trigger.

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.


Frustrating stalemate

If you’d asked me at the beginning of the year—and some people did—how long we were going to have this relatively neutral stance in our sector outlook, I would have thought it highly unlikely that people would still be asking that same question six months later. But that is indeed where we are. Frustrating! Not just for me, but I’m sure for many of you—having a definitive view and a solid path to take would make investing easier. 

But it wouldn’t necessarily be prudent. 

The word “unprecedented” is thrown around often and, in my opinion, is overused. But it’s hard to remember a time such as this, when the leaders of two major economic powers were threatening an extended and damaging trade dispute, while outwardly being quite friendly. At the same time, geopolitical risks are rising and central banks around the world are talking about easing from already largely accommodative stances. 

Among the multiple questions  I am considering when deciding whether to make a move or not:

  • When and how will the trade skirmish end? And will another one start up in its place?
  • Will the conflict with Iran escalate and threaten stability in the region? 
  • Will Britain ultimately exit the EU—and in what fashion?
  • Will easing by central banks, such as the Federal Reserve’s potential rate cuts, help … or hurt?
  • And finally, for now, how much will the American economy slow due to the factors questioned above?

If you know the answers to those questions, I can tell you which sectors are likely to lead and lag—but I certainly don’t know the results of the above. 

I do know the U.S. economy has slowed, leading me to believe a more-defensive posture might be appropriate. I question whether potential Federal rate cuts will do a whole lot of good—are companies going to invest substantially more in capital when money goes from cheap to really cheap, given the uncertainties that still exist in the world economy? Recent data has been fairly downbeat. Manufacturing and services surveys have generally trended lower, although most remain in territory depicting expansion. The Citigroup Economic Surprise Index has plummeted and consumer confidence has shown signs of rolling over. 

ISM surveys are showing declines …

ISM manuf. vs ISM non-manuf

… as are regional snapshots …

regional manufacturing indexes

… while economic surprises have turned decidedly negative …

Citigroup Economic Surprise Index - US

… and consumer confidence looks to be rolling over.

consumer confidence

Looking at this picture, it becomes clear that a more-defensive sector posture should be considered. But then there’s the not-altogether-small possibility that China and the U.S. will come to some sort of trade agreement, especially as the 2020 presidential campaign season kicks into high gear. 

The bigger risk that I see is in the valuations of some of the more-defensive sectors, such as utilities and consumer staples. The decline in the 10-year Treasury yield has apparently pushed more people into more-defensive sectors, which are often higher-yielding, resulting in what, to me, are extended valuations. This raises the risk of a pullback in these areas, in my view—even more so as we’ve seen yields start to tick higher. The current forward price-to-earnings (P/E) ratio for the utilities sector is 19.1, according to FactSet, well above the historical average (according to Strategas) of 15.0. Meanwhile, the consumer staples sector shows a similar story, with a P/E of 19.8, above the 15-year average of 16.8.

An end to the decline in yields could hurt higher-yielding sectors.

10-year Treasury yield

However, valuations, in my experience, have rarely been a good timing tool. And elevated valuations won’t ultimately keep me from moving to a more-defensive posture if the picture continues to deteriorate. But patience can often be a virtue, and a cyclically led blow-off top cannot be discounted, in my view. This article will serve as notice that a move to a more-defensive posture is becoming more likely, and sectors such as utilities and consumer staples are on upgrade alert. 

What can happen in an economic downturn is that investors largely stop paying attention to individual stock fundamentals, and the macro environment becomes the major driving force. And with the advent of easily tradable exchange-traded funds (ETFs), it has become even easier for those large-scale-type moves to occur. So we’ll be watching signals coming out of Washington as to the potential progress in the trade issue, while keeping an eye on the Mideast, and staying laser focused on the economic data coming out in the U.S. We aren’t ready to move just yet, but that day may not be far off—so stay tuned!

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 07/16/19

Communications Underperform 09/28/2018 11% 24.23%

Consumer discretionary





Consumer staples















Health care










Information technology










Real estate










S&P 500®  Index (Large Cap)





Source: Schwab Center for Financial Research and Standard and Poor’s as of 5/31/19.


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.

What you can do next

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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

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 Institute for Supply Management (ISM) Manufacturing Index is an index based on surveys of more than 300 manufacturing firms by the Institute of Supply Management. The ISM Manufacturing Index monitors employment, production inventories, new orders and supplier deliveries.

The Institute for Supply Management (ISM) Non-manufacturing Index is an index based on surveys of more than 400 non-manufacturing firms by the Institute of Supply Management. The ISM Non-manufacturing Index monitors employment, production inventories, new orders and supplier deliveries.

Kansas City Fed Manufacturing is Fed’s monthly survey of the Tenth Federal Reserve District Manufacturers and provides information on current manufacturing activity.

Richmond Fed Manufacturing Index is Fed’s monthly survey of the Fifth Federal Reserve District Manufacturers and provides information on current manufacturing activity.

The Philadelphia Federal Manufacturing Index is an index that is published by the Philadelphia Federal Reserve Bank and is constructed from a survey of participants who voluntarily answer questions regarding the direction of change in their overall business activities. The survey is a measure of regional manufacturing growth.

The Empire Manufacturing State Index is a regional, seasonally-adjusted index published by the Federal Reserve Bank of New York distributed to roughly 175 manufacturing executives and asks questions intended to gauge business conditions for New York manufacturers.

The Dallas Fed Manufacturing Activity Index conducts the Texas Manufacturing Outlook Survey monthly to obtain a timely assessment of the state factory activity.
The Citigroup Economic Surprise Index measures data surprises relative to market expectations. A positive reading means that the data releases have been stronger than expected and a negative reading means that the data releases have been worse than expected.

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 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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