Market Review: The Leaders and Laggards of Q3 2023

The third quarter of 2023 is mercifully in the books. The S&P 500 lost 3.6% for the quarter but is still up 11.7% on the year. Overall, nine of eleven sectors turned in a negative return in Q3. Particularly hard hit were defensive income sectors.

This week we dive into Q3 2023 performance, sector-by-sector. Note that all returns discussed here are total returns, which include the effect of dividends paid during the quarter.

11 Sector Review

Select Sector SPDRs are targeted exchange-traded funds (ETFs) that divide the S&P 500 into 11 sector index funds. These sectors are Communication Services, Consumer Discretionary, Consumer Staples, Energy, Financials, Health Care, Industrials, Materials, Real Estate, Technology, and Utilities. The 11 Select Sector SPDRs represent the S&P 500 as a whole.

Once again, the average sector performed worse than the S&P 500, which has been a trend this year. Year-to-date, only three of eleven sectors have outperformed the S&P 500.

Here was the sector breakdown for the third quarter.

Q3 performance was very similar to Q1’s. As in Q1, eight of 11 sectors underperformed the S&P 500. Income sectors significantly underperformed, primarily a result of rising interest rates.

The clear star of the quarter was the Energy sector, which returned double digits on the back of energy prices that are once again on the rise. The Energy sector is now up 6.1% year-to-date (YTD), after leading all sectors in 2021 and 2022. Chevron (NYSE: CVX), ConocoPhillips (NYSE: COP), EOG Resources (NYSE: EOG), and Schlumberger (NYSE: SLB) are major components of the energy ETF.

The leading sector YTD is Communication Services. The sector added a 1.0% return in Q3 to bring the YTD return to 37.6%. This sector includes diversified telecommunication services, wireless telecommunication services, media, entertainment, and interactive media and services. Components include Facebook (NSDQ: FB), Alphabet (NSDQ: GOOGL), and AT&T (NYSE: T).

The Financial sector lost 1.2% in Q3, but that was good for the 3rd best performance among all sectors. YTD, the sector is down 1.7%. In addition to banks, this group includes financial services firms, insurance companies, and consumer finance companies. Major companies include Berkshire Hathaway (NYSE: BRK.A, BRK.B), JPMorgan Chase (NYSE: JPM), and Citigroup (NYSE: C).

The Health Care sector was also down 2.6% and is down 4.1% on the year. Nevertheless, it was the final sector to outperform the S&P 500 in Q3. The sector includes health care equipment and supplies, health care providers and services, biotechnology, and pharmaceuticals industries. Bellwethers in the health care sector include Johnson & Johnson (NYSE: JNJ) and Pfizer (NYSE: PFE).

The Laggards

The Materials sector was in 5th place for Q3 with a loss of 4.8% but is up 2.6% YTD. This sector includes companies that produce chemicals, construction materials, metals and mining, and paper and forest products. Among its largest components are DowDuPont (NYSE: DWDP) and Sherwin-Williams (NYSE: SHW).

Next up was Consumer Discretionary. For the quarter this sector lost 5.0%, but it is now up 25.5% YTD — good for 3rd among all sectors. This sector includes industries such as automobiles and components, consumer durables, apparel, hotels, restaurants, leisure, media, and retailing. It is comprised of companies such as Amazon (NSDQ: AMZN), Home Depot (NYSE: HD), and Walt Disney (NYSE: DIS).

The Industrial sector lost 5.1% for the quarter but is up 4.5% YTD. Industrial sector component industries include building products, construction and engineering, electrical equipment, conglomerates, machinery, and aerospace/defense. Important constituents of the Industrials sector include Boeing (NYSE: BA), 3M (NYSE: MMM), and Honeywell (NYSE: HON).

Technology is the 2nd best performer YTD, rising 32.6%. But it gave up some gains in Q3, slipping 5.5%. This sector includes technology hardware, storage, and peripherals; software; communications equipment; semiconductors and semiconductor equipment; IT services; and electronic equipment. Components of this ETF include Apple (NSDQ: AAPL), Microsoft (NSDQ: MSFT), and Intel (NSDQ: INTC).

Defensive Sectors Take a Beating

Finally, we come to the three defensive sectors that lagged all others in Q3.

Consumer Staples lost 6.6% in Q3. Making up this sector are companies involved in the development and production of consumer products that cover food and drug retailing, beverages, food products, tobacco, household products, and personal products. Component stocks include Procter & Gamble (NYSE: PG), Philip Morris International (NYSE: PM), and Coca-Cola (NYSE: KO).

The Real Estate Index is struggling with rising interest rates. In Q3 the sector’s -8.9% return lagged the S&P 500 by 5.3%. This index consists primarily of real estate management and development companies and real estate investment trusts (REITs). Simon Property (NYSE: SPG) and American Tower (NYSE: AMT) are among the largest representatives of this group.

The Utilities sector continues to underperform. It was in last place in Q3 with a decline of 9.2%, and is also in last place for the year, down 14.4%. The declines were primarily driven by inflation and rising bond rates. Companies that produce, generate, transmit or distribute electricity or natural gas predominantly make up the Utilities sector. Component companies include NextEra Energy (NYSE: NEE), Duke Energy (NYSE: DUK), and Dominion (NYSE: D).

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It has really been an unusual year. A well-diversified portfolio is probably lagging the S&P 500, simply because most sectors have underperformed the benchmark. The average portfolio probably looks more like the Dow’s 2023 performance, which is up only 1% YTD, about 11% behind the S&P 500’s YTD gain.

The fourth quarter is likely to prove challenging as well, as higher energy prices and ongoing high interest rates will provide headwinds. The biggest catalyst in the months ahead would be a sign from the Federal Reserve that interest rate hikes have come to an end.

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