Weekly Commentary August
Schwab Market Perspective: The Next Phase?
By Liz Ann Sonders, Senior Vice President, Chief Investment Strategist, Charles Schwab & Co, Inc; By Jeffrey Kleintop Senior Vice President, Chief Global Investment Strategist;
August, 2021
Key Points: Although we’re not out of the pandemic yet, the economy is showing encouraging signs. Job growth has been strong and financial markets appear to confirm that the economic cycle has shifted from recovery to expansion. Global earnings estimates are being revised upward and global business leaders are expressing fewer concerns about supply constraints than earlier this year. Given these signs, the Federal Reserve may start tapering its support for the economy sooner than expected. Which isn’t to say there aren’t market risks out there, including the spread of the COVID-19 delta variant, overly bullish investor sentiment (a contrarian indicator when taken to extremes), and the return of the federal government’s debt ceiling. Let’s take a deeper look:
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Sector Rating Updates:
Consumer Discretionary: Marketweight
Key Points
- Weakness from Amazon led to sector underperformance in July.
- Companies with larger brick-and mortar presences, like Home Depot, Lowe's, and Target, have performed well as instore sales bounce back.
- It will be hard for the sector to outperform while Amazon is struggling.
Energy: Overweight
Key Points
- Crude oil finished July roughly flat, but Energy underperformed by over 10% during the month.
- Crude technicals and inventory trends remain bullish.
- Sector model is overweight Energy.
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Materials: Marketweight
Key Points
- The Chemicals industry has weighed negatively on Materials.
- Sector model turned bearish on Materials in July.
- We have the sector on watch for a downgrade.
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Utilities: Marketweight
Key Points
- Utilities outperformed by over 200 basis points in July.
- Rising capex spending could lead to strong future EPS growth.
- The sector finished July with the highest-overall sectormodel score.
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Financials: Overweight
Key Points
- Financials was the second-worst performing sector in July.
- Falling rates and a flattening yield curve are bearish for the sector.
- We neutralized our nearly seven-month overweight of Financials on July 15.
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Health Care: Underweight
Key Points
- Health Care was the top-performing sector in July.
- Rising COVID cases led to a transition of leadership to COVID leaders.
- The sector model upgraded Health Care to marketweight, matching our recommendation.
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Industrials: Overweight
Key Points
- Industrials underperformed in July despite progress made ona bipartisan infrastructure plan.
- Several technical indicators, including trend, breadth, and momentum, are bearish for Industrials.
- We downgraded Industrials to marketweight on July 15.
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IT: Marketweight
Key Points
- Both Apple and Microsoft outperformed in July.
- FANMAG has acted more defensively, outperforming in four of the last five market declines of 5% or more.
- We upgraded Technology to marketweight on July 15.
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Real Estate: Marketweight
Key Points
- Real Estate was the second-best performing sector in July.
- Sector model remains marketweight, but REITs Scorecard turned bullish in July.
- We have Real Estate on watch for an upgrade.
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Consumer Staples: Underweight
Key Points
- Consumer Staples is the worstperforming sector on the year.
- A weaker second half could benefit defensive-oriented sectors.
- The sector had the lowest sector model score at the July month-end update.
Communication Services: Marketweight
- Facebook and Alphabet led Communication Services higher in July.
- FANMAG sales growth accelerated, and margins expanded in Q2.
- Sector model downgraded the sector to underweight in July.
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