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Schwab Sector Views: The Business Cycle: Is it Different This Time?


Brad Sorensen

CFA, Managing Director of Market & Sector Analysis, Schwab Center for Financial Research

Brad Sorensen heads market and sector analysis for the Schwab Center for Financial Research and writes for several Schwab publications. He is a member of Schwab's Investment Strategy Council.

Before joining Schwab in 2004, he was a senior analyst at AMG Guaranty Trust, where he designed portfolio strategies for high-net-worth individuals. Sorensen graduated from the University of Colorado with a bachelor's degree in finance and master's degrees in business administration and finance. He is a Chartered Financial Analyst charterholder.

March 05, 2019
Submitted by Site Factory admin on March 5, 2019
Schwab Sector Views
Key Points

The “business cycle” describes the rise and fall of economic activity, and has historically been a good indicator for sector performance. 

There appear to be some changes within the sector universe and the economic environment that may be rendering some of those traditional relationships obsolete. 

Investors have to be willing to react to the situation as it is, not as it was or as we hope it to be, which requires patience and discipline. 

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.


The Business Cycle

It’s different this time. 

In my view, that can be one of the most dangerous mindsets for investors to have—every business cycle has differences, of course, but ignoring historical evidence can be dangerous. We heard that phrase bandied about during the tech bubble in the late 1990s, only to find out it really wasn’t all that different—having a profitable business still mattered! And I have the opposite phrase running through my head on a loop—“it’s never different”—to remind myself not to ignore history when looking at the potential future. However, lately there have been developments that have led me to consider that things might actually be different—at least somewhat. 

Before we get into that, let’s do a quick review. The business cycle is a term that describes the rise and fall of economic activity. The business cycle usually follows a predictable path, beginning with early expansion, which is usually marked by rising growth as the economy emerges from a downturn. As the tide rises toward maturing expansion, employers start to hire more, consumers earn and spend more, companies build more…and inflation starts to increase. In late expansion, inflation becomes concerning, imbalances build up, the Federal Reserve starts to tighten policy and growth peaks and starts to descend in recession—eventually to start the cycle over again. 

What has made the business cycle particularly helpful for sector investors is that certain areas of the economy have tended to outperform or underperform depending on the stage of the cycle. Our research is summarized in the chart below. As a reminder, this doesn’t mean that sectors will perform this way every time, but it has been a helpful tool. 

Business cycle phases

Source: Schwab Center for Financial Research

So sector investing is easy, right? Well, of course the challenge historically has been determining where we are in the business cycle, and if there are any anomalies that would render the above guidelines inaccurate. But finance students throughout history have relied on something similar to the above table when learning about the relationship between the stock market and the economy. 

But is that changing?

Possibly. For example, the real estate sector and the utilities sector are both up by more than 13% over the past 12 months, while communication services and consumer staples have been the third- and fourth-best performers over the past year. While not conclusive, in my view it is interesting, and we have to at least wonder if something is different. 

The answer is yes. Coming out of the 2008 financial crisis, we had unprecedented actions by central banks that are continuing to this day. Central banks have pushed interest rates below zero in some countries, with German 10-year bonds recently trading at yields of -0.60%, while Japanese 10-year yields were recently below -0.20%. That means that investors are willing to loan their money to governments—and get less money back in return! That is indeed different—and certainly not covered in any of the textbooks I had in college! As a result of this and many other factors that I don’t have time to get into here, U.S. rates have stayed remarkably low for an extended period. 

Low rates have persisted since the financial crisis

10-year Treasury yield 20yr w financial crisis highlight

What’s the result? We’ve seen income-seeking investors looking more to the equity markets, and driving higher-yielding sectors, such as real estate and utilities, higher at the same time—historically, real estate would benefit from a good economic environment and utilities would benefit from the opposite. Our friends at Cornerstone Macro point out another change in historical precedent: The financial sector historically has had a negative correlation with interest rates—meaning the sector rose as yields fell—as lower rates stimulated loan demand. However,  since the financial crisis the correlation has flipped, with the sector now having a strong positive correlation with rates.

Additionally, the sector world has changed. Almost a year ago, the tech and consumer discretionary sectors were drastically changed as companies moved out and into the new communication services sector. As a result, for example, the tech sector’s beta—a measure of how volatile the sector is—has dropped, while the dividend yield for the group has risen from roughly 0.2% in 2000 to more than 1.5% currently (Cornerstone).

What does it mean? 

The first thing is that it means sector investing has become a bit more challenging!  
For investors, this doesn’t mean ignoring the economic environment as it will still have a major impact on sector performance. But realize that some of the old relationships may not hold and that you may need to be flexible in your thinking that things, at least for now, have changed. The final lesson is that this environment, in my view, demands patience. With trade uncertainty and interest rate volatility, sector leadership has shifted from cyclical to defensive quickly multiple times over the past couple of years. Patience is not one of my strong suits—just ask my wife and daughter—but I’ve had to learn to improve … with sector investing, and my wife and daughter! I suggest that might be the best course of action for you at the present time, as well. 

Things can change quickly, as we’ve seen, so please check back often, as patience can turn to action in the blink of an eye!

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 08/13/19

Communications Underperform 09/28/2018 11% 21.36%

Consumer discretionary





Consumer staples















Health care










Information technology










Real estate










S&P 500®  Index (Large Cap)





Source: Schwab Center for Financial Research--as of 07/31/19


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.

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