Schwab Sector Views: Coronavirus Changes Our Views

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 month.

In light of recent events, we’re changing our ratings on certain equity sectors—specifically, we’re downgrading Financials and upgrading Utilities. Here are our current ratings and our views of the sectors’ underlying fundamentals.

Sector overview

Note: Each of the sector lenses shown above—Macroeconomic, Value, Fundamental and Relative Strength—is both intuitive and evidenced-based in nature. Within each, there are a varying number of factors. The Macroeconomic lens includes sector sensitivities to interest rates, stocks and the value of the U.S. dollar; the outlook for each of these is determined by the Schwab Center for Financial Research (SCFR)’s Asset Allocation Working Group, which uses a mosaic approach of quantitative and qualitative considerations. Value includes six different valuation metrics that provide a holistic perspective on current valuations relative to each of the sectors’ own historical valuations, as well as relative to the other sectors. Fundamental provides insight as to how efficiently the companies within each sector use invested capital to produce earnings; this historically has been informative as to future relative performance of the sectors. Finally, Relative Strength measures momentum of the individual sectors against all of the other sectors. We also consider the data in the context of factors outside the scope of these indicators—for example, geopolitical risk or central bank policy changes.
Source: Charles Schwab, as of 3/4/2020

Why the change in our sector views?

Last month, we wrote that the coronavirus outbreak and the Democratic primary had created uncertainty that was beginning to affect certain equity sectors. At that point, we were monitoring the situation, but hadn’t changed our sector calls.

Well, things have changed—quickly. As the COVID-19 virus has spread around the world, including to the U.S., the market impact has become more pronounced. We’re seeing signs that the direct impact on supply chains out of China is having an increasing influence on U.S. company earnings. Many industries also are showing signs that demand has been affected.