Download the Schwab app from iTunes®Get the AppClose

  • Find a branch
To expand the menu panel use the down arrow key. Use Tab to navigate through submenu items.

Schwab Sector Views

Schwab Sector Views: Keeping Your Portfolio “Healthy”

Key Points
  • The health-care sector has both growth and defensive characteristics that we believe could be beneficial in this environment.

  • There are risks to the group, as well, largely political, but we believe those are allowing the sector to trade at attractive valuations and provide a good potential entry point for investors.

  • We believe the health-care sector provides a good balance for our more cyclical outperform recommendations.

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.

Patients and patience

The English language is funny sometimes. All those who understand the intricacies of the language can find the irony in the homonym of “patients” and “patience”—the former often requires much of the latter. And that has been the case for investors, as well, as the health-care sector has been weighed down at times, largely due to concerns over political actions that could crimp profitability.

Few would argue—and that’s been part of the problem—that good health care is a critical part of living the life most of us want to live. But as we’ve discussed before, that doesn’t always lead to something being a good investment. In fact, it’s that view of the necessity of good health care that had caused some of the issues for the health-care sector. Calls for government-funded health care and political attacks on various health-care companies have seemed to cause some investors to be hesitant in approaching the group. But the sector has been quietly performing better, modestly outperforming the overall market over the last month and year to date. The sector is more diverse than many investors may believe. Although the biotech and pharmaceutical industries often take up much of the headlines, the second-largest industry (behind pharmaceuticals) is health-care equipment and supplies, followed closely by health-care providers and services, providing a bit more diversification within the sector than may be initially believed.

Why now?

But why should you look at the health-care sector for an outperform prospect? It’s no secret that we’re all getting older (sorry), which means health-care services probably are going to be in higher demand. Although the U.S. birth rate has dropped¹ to a 30-year low, Americans are living longer.

We’re getting older…

…and living longer.

That’s the case globally as well, with life expectancy projected to increase by more than a full year between 2016 and 2021, to 74.1 years from 73 years, according to a recent report by Deloitte.² However, Deloitte notes that the improvement is not only because of improvement for care at the older end of the spectrum, but largely because the global infant mortality rate continues to fall.

Western-style medicine isn’t the only thing being brought to the rest of the world. Some of the West’s bad habits—including sedentary lifestyles, unhealthy diets and obesity—are on the rise, as well. The same Deloitte report notes that the global number of people with diabetes is expected to grow from around 415 million currently to over 640 million by 2040, with China and India already accounting for the largest number of diabetes sufferers. Additionally, the number of people with dementia is estimated to double every 20 years, building on what is already a trillion-dollar business. While we’re certainly not going to cheer these developments, to us it does indicate that there is going to a growing demand, both here and around the world, for more health-care services.

50 is the new 40

But it’s not just life-extending medical needs that we believe will aid the sector. As both millennials and baby boomers age, we believe life-enhancing items including cosmetic procedures, replacement joints, drugs that improve aspects of life, etc., will see even more demand in the coming years. Households spent more on health care during the past 20 years, and we believe that trend will generally continue.

Health care spending has trended higher.

With U.S. unemployment near a record low at 4% (and the unemployment rate for those 65 and older is even lower, at 3.3% in June, according to the Bureau of Labor Statistics) and incomes rising, we see the American consumer having more money to spend on those more discretionary items. And you may have heard it said that millennials value experiences over material things—as they get older they may be even more interested in maintaining the health required to continue with those experiences.

Unemployment is low ...

... and wages are rising.

And there are indications such issues are growing more important in other areas as well, with Evercore ISI Research reporting that in China cosmetic retail sales are up 12% year-over-year, while e-commerce beauty spending is up 30% over the same period.

The risks

As mentioned above, however, this increase in demand can cause problems. There is a growing chorus of complaints about the cost of health care, and the debate grows about what role government should play in the regulation and delivery of health care services in the United States. Drug costs have been a hot political topic, with President Donald Trump providing some fuel to that fire at times, by complaining about the perceived high cost of some drugs. There have, however, been some recent developments that may help to cool the rhetoric, at least for a time. Major drug companies such as Pfizer, Novartis and Merck have announced plans to both roll back some price increases and freeze plans for future increases for the time being. These moves may have had a limited overall impact on drug costs, but they did allow the president to claim some form of victory, and in our view have reduced some of the near-term political risk for the group.

I could go on and on about the political situation surrounding the sector, and the opportunities and exciting developments occurring in the group, but that may require a book. So let me make one last point: Tariff issues and the recently stronger dollar have both caused some investors concern. However, to our knowledge, the health-care sector has largely been immune from the tariff threats to this point. Meanwhile the group historically has had little correlation with the dollar in either direction, which could provide some nice diversification benefits to investors.

Health care could provide a buffer from stronger dollar.

As with all investments, there are risks in the health-care sector, but we also see great potential opportunities for the group. Also, with a relative price-to-earnings ratio (according to Yardeni Research) of 0.9, valuations of the group look relatively attractive to us. For tactical investors who have followed our more cyclical “outperform” recommendations, we believe health care provides some of those potential growth characteristics, while also providing defense, which to us is pretty attractive in the current environment.

 

¹ Source: “Births: Provisional data for 2017,” National Center for Health Statistics, Centers for Disease Control and Prevention, May 2018.

² Source: “2018 Global health care outlook: The evolution of smart health care,” Deloitte, 2018.

 

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 07/31/18

Consumer discretionary

Marketperform

07/17/2014

13%

13.56%

Consumer staples

Marketperform

05/07/2015

7%

-4.83%

Energy

Marketperform

11/20/2014

5%

8.32%

Financials

Outperform

05/07/2015

15%

0.97%

Health care

Outperform

01/26/2017

14%

8.57%

Industrials

Marketperform

01/29/2015

10%

2.29%

Information technology

Outperform

04/29/2010

25%

13.19%

Materials

Marketperform

01/31/2013

3%

-0.21%

Real estate

Underperform

01/26/2017-

3%

1.90%

Telecom

Underperform

09/12/2013

2%

-6.22%

Utilities

Underperform

05/23/2013

3%

2.19%

S&P 500®  Index (Large Cap)

 

 

 

6.47%

Source: Schwab Center for Financial Research and Standard and Poor’s as of 07/31/18.

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

To discuss how this article might affect your investment decisions:

Energy Sector
Energy Sector Rating: Marketperform
Consumer Discretionary Sector Rating: Marketperform

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.

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. The above mentioned companies should not be construed as a recommendation or endorsement.

Diversification and rebalancing 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 S&P 500® Health Care Index comprises those companies included in the S&P 500 that are classified as members of the GICS® Consumer Health Care sector.

The Intercontinental Exchange (ICE) U.S. Dollar Index is an index of the of the United States dollar relative to a basket of foreign currencies, and is a weighted geometric mean of the dollar’s compared to the Euro (EUR), Japanese yen (JPY), Pound sterling (GBP), Canadian dollar (CAD), Swedish krona (SEK) and Swiss franc (CHF) relative to March 1973.

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.

(0818-8UPA)

Thumbs up / down votes are submitted voluntarily by readers and are not meant to suggest the future performance or suitability of any account type, product or service for any particular reader and may not be representative of the experience of other readers. When displayed, thumbs up / down vote counts represent whether people found the content helpful or not helpful and are not intended as a testimonial. Any written feedback or comments collected on this page will not be published. Charles Schwab & Co., Inc. may in its sole discretion re-set the vote count to zero, remove votes appearing to be generated by robots or scripts, or remove the modules used to collect feedback and votes.