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Energy Among A Handful Of Sectors To Stand Out Amid Trumpflation

Omar Aguilar, Chief Investment Officer of Equities and Multi-Asset Strategies at Charles Schwab Investment Management writes that in today’s inflationary environment, a handful of sectors are primed to stand out.

Stocks continue trending higher

Fueled by favorable unemployment numbers and positive corporate earnings, U.S. stocks have continued to trend higher. Expectations for corporate tax reform and infrastructure spending continue to fuel “animal spirits” and investor confidence, driving up stocks. At the same time, the probability of disappointment seems to have increased with every point added by the Dow.

Currency considerations and central banks

The U.S. dollar has been weaker this year, reflecting uncertainty regarding new trade policies and a clouded political outlook. In turn, the weaker U.S. dollar has provided a tailwind for many emerging markets and commodities. The role of the central banks has been less dominant so far in 2017, but the rising level of commitment to move toward normalized interest rates could generate currency volatility later this year.

On the horizon

Looking ahead, we will continue to monitor these and other developments closely to see if U.S. economic data, inflation, corporate profits, and economic improvement internationally evolve to meet market expectations. For now, we believe that the Financials, Energy, and Industrials sectors are better positioned to benefit from this environment than the retail industry or the Telecommunications and Utilities sectors, which we believe could underperform if global bond yields continue to rise.

The Energy Select Sector SPDR ETF (NYSE:XLE) was trading at $72.04 per share on Tuesday morning, down $0.74 (-1.02%). Year-to-date, XLE has declined -4.35%, versus a 2.51% rise in the benchmark S&P 500 index during the same period.

XLE currently has an ETF Daily News SMART Grade of A (Strong Buy), and is ranked #1 of 38 ETFs in the Energy Equities ETFs category.

This article is brought to you courtesy of Charles Schwab Investment Management.

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