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Schwab Sector Views

Schwab Sector Views: 19 Thoughts Heading Into ’19

Key Points
  • We saw a pickup in volatility in 2018 amid concerns about peak growth, trade friction and Federal Reserve monetary policy tightening.

  • The uncertain outcomes of the above issues led our sector views to be slightly defensive—we currently having the fewest number of outperform/underperform calls ever.

  • We don’t love having so few up/down calls, but we believe we’re at an inflection point that could break one way or the other.

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 upcoming holidays, the next version of Sector Views will be published on January 3, 2019.

A tradition continues

An annual tradition continues, with the last publication of the year really shaping up to be the first of the new year, as I share my thoughts on what could affect sectors and our decisions as we head into 2019. I would say this is an exercise in emptying my brain onto these pages, but that would take far more than 19 thoughts! Rather, the purpose of this is to give you an insight into what we are looking at in relation to potential recommendation changes, while also giving you food for thought as you make investment decisions. If nothing else, it gives you items to discuss besides religion or politics when the family comes over for the holidays! Enjoy!

Deep thoughts

1.    We believe we’re at an inflection point with the market. Depending on how a few major issues turn out, we could turn more aggressive or more defensive from our current regularly neutral stance. 

2.    At the top of that list—Federal Reserve policy. Will policymakers go too far, inverting the yield curve and pushing the economy into recession? Or pause in their campaign, which could result in another leg up in the bull market, benefitting more-cyclical sectors. Inflation remains modest overall, but wages are ticking higher and labor remains tight.

Inflation remains relatively tame…

CPI YoY

…although wages are moving higher…

AHE YoY %-change, annualized, 3-mo MAV

…as the labor market remains tight.

Unemployment rate

3.    Fed commentary has generally indicated they are willing to tolerate a little higher inflation in the interest of not repeating the history of central banks killing economic growth—which makes me lean toward the more-cyclical groups like industrials, materials and energy. 

4.    Fed Chairman Jerome Powell walked back his early-October comment that the Fed is “a long way from neutral” by recently stating that the current rate is “very close” to neutral (Wall Street Journal). 

5.    OK—there’s not a lot of clarity there, although the central bank seems to be aware of the potential in overdoing rate hikes. It’s a similar situation with the current U.S. trade situation, where the uncertainty could be hurting capital spending.

Capital spending could be hurt by trade uncertainty

Nonresidential Fixed Investment QoQ

6.    The National Federation of Independent Business (NFIB) survey continues to indicate business remains confident, with 30% reporting plans to expand capital spending in the next few months—indicating to me that if the trade situation were to end positively, companies would likely spend. 

7.    The principal players in the China/U.S. trade talks recently announced a “truce” in the trade war, although the ultimate outcome of negotiations remains in question. However, if an agreement is reached, sectors such as industrials and tech would stand to benefit, in my view. 

8.    Which leads me to a couple of political thoughts (leave these out of holiday discussions!). Will the new Congressional balance come to an agreement with regard to drug pricing that will amount to some form of price control? Right now I believe they won’t, which leads me to keep our outperform rating on health care.

9.    Will the politicians come to an agreement on an infrastructure package, which would likely benefit the industrial sector? I would place higher odds on this, but still seems unlikely to me as the environment in Washington seems more disagreeable than agreeable. 

10.    The one area where I think they could come to some agreement is in regulating some or all of the FANG names (Facebook, Amazon, Netflix and Google/Alphabet). Already we’ve seen Europe place more standards of privacy on such companies, and it seems the U.S. may not be far behind—potentially hurting the growth of advertising revenue, which contributes to our underperform rating on the communications sector. 

11.    Enough politics! But around the holiday table you may see various family members’ heads buried in their phones. Which leads me to thinking—how much growth can there be in some of the social media areas? The dangers of social media are being increasingly reported, with Apple now offering iPhones that can limit the time users spend on such “activity.” We offer these thoughts to lead to actual discussion—and providing a break from phone usage!

12.    But consumers remain confident, which indicates they will likely continue to spend money, increasingly online, but that doesn’t mean brick-and-mortar is dead.

Consumer confidence remains elevated

consumer confidence

13.    Which brings me to the subject my wife gets tired of me talking about. Why do retailers that are struggling blame the internet when I walk through their stores and see a dingy atmosphere, disinterested employees, and an overall poor shopping experience?

14.    Retailers need both and internet and brick-and-mortar strategy, evidenced by the recent opening of Amazon retailer locations. Additionally, it’s increasingly about the experience, and not just the products, which should lead to the weak failing and the strong thriving … in my view. 

15.    The recent fall in oil prices should also help consumers as energy and gas prices come down. However, is it also a “canary in the coal mine” of potentially slower global growth?

The drop in oil could help consumers, but also a potential signal

WTI crude

16.    We remain neutral on energy as OPEC talks about potentially limiting production, while the U.S. continues to increase production. There are likely to be sharp moves in both directions, much as we’ve seen, leading, we think, to a roughly in line market performance. Those looking to make tactical moves in the energy space should be careful—prices can reverse quickly.

U.S. production continues to rise

Crude oil production YoY, 3-mo MAV

17.    Technology has helped oil producers find more oil in a more cost effective manner. What will the new tech sector, after the spinning off of major companies to the communications sector, behave like? We think it will be more defensive, eventually, as companies use their large cash balances to increase dividend payments. 

18.    I continue to like tech, and have many thoughts on the tech sector. A major one is that if the economy continues to grow, tech may continue to benefit as companies look to increase efficiency, given the tight labor market, and consumers look to upgrade—given the elevated confidence levels. We remain neutral for now, however, given the uncertainties mentioned in earlier thoughts. (My thoughts often run in circles!)

19.    Wait…19 already?! The thought I’ll leave you with is similar to the one I began with. I get antsy only having two outperform/underperform calls, but I also think the risks are roughly balanced to the up and down sides. Developments that change this equation can come quickly so be prepared for potential quick changes in recommendation…but also remain patient!

I don’t know what I’m going to do in the year 2101—101 thoughts or just 1? Judging by the trouble I had narrowing this year’s list down to 19 I think I’ll lean toward the former—if my wife lets me keep doing this! 

Final thought—thank you for reading this and I hope you have found it useful. But most of all I hope for all readers a happy and prosperous 2019!

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 12/04/18

Communications Underperform 09/28/2018 10% N/A*

Consumer discretionary

Marketperform

07/17/2014

10%

8.08%

Consumer staples

Marketperform

05/07/2015

7%

-0.93%

Energy

Marketperform

11/20/2014

6%

-6.83%

Financials

Marketperform

08/16/2018

13%

-5.85%

Health care

Outperform

01/26/2017

15%

14.33%

Industrials

Marketperform

01/29/2015

9%

-6.04%

Information technology

Marketperform

08/16/2018

21%

6.95%

Materials

Marketperform

01/31/2013

3%

-9.65%

Real estate

Marketperform

08/16/2018

3%

4.65%

Utilities

Marketperform

08/16/2018

3%

9.60%

S&P 500®  Index (Large Cap)

 

 

 

2.82%

Source: Schwab Center for Financial Research and Standard and Poor’s as of 11/30/18.

.*The Communications Sector came into existence on 9/28/18, and the year-to-date information is not comparable to rest of the groups so we are omitting it until the end of the year.

 

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:

Schwab Market Perspective
Schwab Market Perspective: Gathering Storm or Passing Clouds?
Real Estate Sector Rating: Marketperform
Real estate sector

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. 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 Consumer Price Index (CPI) is an index that measures the weighted average of prices of a basket of consumer goods and services, weighted according to their importance.

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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