Schwab Sector Views: What if Inflation Persists?

Schwab Sector Views is our three- to six-month outlook for stock sectors, which represent broad sectors of the economy. It is published on a monthly basis and is designed for investors looking for tactical ideas.

Signs are growing that inflation may be more tenacious than originally expected. We don’t believe a return to 1970s-style inflation is likely, but there is a worrisome scenario in which persistently sharp increases in prices could be a factor to reckon with—and if history is any guide, they could have an impact on sector performance.

In every market environment there tend to be winners and losers, and inflationary periods are no exception. When inflation is stubbornly high, sectors such as Energy, Real Estate, Health Care, Utilities, and Consumer Staples historically have outperformed on average. Others such as Consumer Discretionary, Industrials, Materials and Financials have struggled in general.

Of course, there are always extenuating circumstances that make every inflationary cycle different. The lopsided impact of the COVID-19 pandemic could alter some historical patterns. For example, Information Technology historically has struggled when inflation was high and rising. However, technology has become so integral to daily life and the overall economy—more so during the pandemic, when working remotely, shopping online, and streaming entertainment became ubiquitous—that the sector may react differently to high inflation going forward.

To be clear, we don’t think that we are currently in the more dire inflationary scenario, but the market might periodically reflect investors’ worries that we are going down that path—so let’s take a look at how various sectors might perform, and why.

Hypothetical sector relative performance during a period of high inflation