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Schwab Sector Views

Schwab Sector Views: Christmas in July!

Key Points
  • The state of the American consumer is key to economic outlooks for both the U.S. and, at times, the world. Find out how consumers are doing.

  • While the consumer is solid, that doesn’t necessarily translate to stock outperformance, and for now we’re holding neutral ratings on both major consumer sectors. 

  • Higher energy prices, sluggish wage growth, and intense competition all are risks that keep us in the neutral category … for now.

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.

Christmas is here again, stand up and…

Lest you be deceived, I am not a start-celebrating-Christmas-early guy. Each holiday should be celebrated in its own time—and in the case of Christmas, that shouldn’t begin before December 1, in my opinion. But nobody cares what I think about that, and the annual “Christmas in July!” sales are an American tradition. July—normally a relative dead spot in the retail year—is still a time when retailers try to rev up the consumer. Even the mighty Amazon had a 36-hour Prime member sale recently, referred to by many as “Black Friday in July,” proving that no one’s too good for a sale!

Ah … Paris!

But after recently walking through the streets of Paris with my beautiful wife I was struck by how many Americans were there, and how many shops lined the street. To walk down the famous Champs-Elysees was to see some of the most amazing and high-end shopping experiences in the world—my wife came back with a key chain. Since I’m always working for you, the sight of crowds in the stores and the bags in the street led me to think that there must be some very healthy consumers out there. But are they American and how broad is the strength? And is there an investing angle we can take from it?

All systems go? 

With my feet back on American soil, the status of the American consumer looks quite solid. Consumer confidence is good, with The Conference Board’s Consumer Confidence Index® coming in at 126.4 in June, reflecting little damage from the ongoing trade disputes at this point. In fact, the CNBC All-America Economic Survey published on June 25 showed American support for the tariff increases had risen to 45%, up from 29% in March, while 38% disapproved. 

Consumer confidence is high

consumer confidence

One reason confidence remains high in the face of increased trade tensions could be that Americans are finally recognizing the impact of the tax cut on their wallets. According to Strategas Research, the consumer and small business portion of the tax cut amounted to roughly $112.5 billion in 2018, a pretty solid amount into the pocket of the consumer. Of course, there have been many stories about how the increased costs of goods due to the trade disputes are going to eat up that money. More importantly, at least in our view, is that the labor market continues to look extremely healthy. The unemployment rate was near a historic low at 4.0% in June, according to the Department of Labor, and according to the JOLTS report (Job Opportunities and Labor Turnover Survey), there are now more jobs available than there are people looking to fill them. 

The unemployment rate is near an historic low

Unemployment rate

Meanwhile, companies are demanding more workers than are available

Number of unemploed per job opening

Everything’s coming up roses … right? So why haven’t the Consumer Staples sector and the Consumer Discretionary sector (excluding Netflix, which will be removed from the group in September and placed in the new Communication Services sector, and Amazon) done better?

Consumer stocks have largely struggled, although they have perked up lately

S&P 500 Staples vs S&P 500 Disc. ex AMZN and NFLX

Consumer headwinds

There are headwinds facing the consumer, starting with the sluggish wage growth we’ve seen throughout much of this economic expansion. While that has allowed inflation to stay relatively low and the Federal Reserve to proceed on a slow and steady course toward monetary policy normalization, it may also have impeded Americans’ ability to really ramp up spending. And after the financial crisis, we haven’t seen debt increase in a substantial way, which could have helped to further fuel spending. 

Sluggish wage growth…

Avg. Hourly Earnings YoY %-change, annualized, 3-mo MAV

… has combined with little debt addition.

Debt service ratio

Also, some more recent concerns have been added to the list. As mentioned, the Fed is raising rates, and despite it being at a slow pace it is a de facto monetary policy tightening—lending conditions are now tighter than they were, and Fed officials have indicated no sign of stopping. Also mentioned above are the tariffs imposed on products that Americans buy. While it isn’t a numerically big deal at this point, there is the potential for it to grow, and the longer it goes on the more potential there is for confidence to be dented. Finally, for now, there are higher oil prices to consider. While we are less dependent on oil than we used to be—with more efficient cars and appliances combining with different fuel sources to make oil a little less important to our society—if oil prices continue to gain from here it would likely start to affect the ability, and willingness, of consumers to spend. 

Higher oil prices could pose a threat to consumer spending.

Brent crude

Therefore…

With the positive picture of the consumer darkened slightly by the risks outlined above, we view the current status of the consumer as strong, but not necessarily outstanding. The consumer is the powerhouse behind the American economy and that bodes well, but doesn’t guarantee anything. As for the consumer-related sectors, the Discretionary sector is about to undergo some changes that could affect our view, while the Staples sector has largely underperformed. Staples may be attractive for a near-term bounce, but the level of competition the group continues to face means we are keeping our neutral view in place at this time. 

But that doesn’t mean you should sit on the sidelines—by all means, go out and enjoy Christmas in July! The real thing will be here before you know it!
 

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 07/02/18

Consumer discretionary

Marketperform

07/17/2014

13%

15.30%

Consumer staples

Marketperform

05/07/2015

7%

-6.06%

Energy

Marketperform

11/20/2014

5%

5.63%

Financials

Outperform

05/07/2015

15%

-0.68%

Health care

Outperform

01/26/2017

14%

6.61%

Industrials

Marketperform

01/29/2015

10%

-1.90%

Information technology

Outperform

04/29/2010

25%

16.64%

Materials

Marketperform

01/31/2013

3%

-1.66%

Real estate

Underperform

01/26/2017-

3%

0.55%

Telecom

Underperform

09/12/2013

2%

-6.53%

Utilities

Underperform

05/23/2013

3%

1.33%

S&P 500®  Index (Large Cap)

 

 

 

6.18%

Source: Schwab Center for Financial Research and Standard and Poor’s as of 06/29/18.

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

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

The CNBC All-America Economic Survey polled 800 adults nationwide June 16-19. The survey has a margin of error of plus or minus 3.5 percentage points.

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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