All Sectors Rocket Higher in Q1
The first quarter of the year is in the books. Following a steep December sell-off, the S&P 500 returned 13.1% for the quarter, its best quarterly performance in nearly 10 years.
According to the Select Sector SPDR exchange-traded funds (ETFs) that divide the S&P 500 into sector index funds, every sector gained in Q1. The energy sector was one of the top-performing sectors.
Every S&P 500 sector recorded a gain for the quarter, while nine of 11 sectors recorded double-digit gains.
Let’s dissect the first quarter of 2019, sector-by-sector.
11 Sector Review
Select Sector SPDRs are targeted ETF) 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.
Previously both Communication Services and Technology were captured by the Information Technology sector, but those were split into two categories last year.
Six sectors outperformed the S&P 500 during the first quarter.
Technology was the quarter’s biggest winner, with a first quarter gain of 19.8%. 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).
The Real Estate Index, consisting primarily of real estate management and development companies and real estate investment trusts (REITs), was the second-best quarterly performer with a return of 17.5%. This sector is now the top-performing sector over the past 12 months with a total return of 20.9%. Simon Property (NYSE: SPG) and American Tower (NYSE: AMT) are among the largest representatives of this group.
In third place were the Industrials, which had lagged in recent years due to General Electric’s (NYSE: GE) decline. This sector’s strong Q1 gain of 17.2% was driven in part by some recovery in GE shares. Component industries include aerospace and defense, building products, construction and engineering, electrical equipment, conglomerates, and machinery. In addition to GE, important constituents include Boeing (NYSE: BA), 3M (NYSE: MMM), and Honeywell (NYSE: HON).
The Energy sector returned 16.2% for the quarter, good enough for fourth place. Performance was driven by sector bellwethers such as ExxonMobil (NYSE: XOM), which surged 19.8% during the quarter. Some of the XLE’s biggest holdings are Chevron (NYSE: CVX), ConocoPhillips (NYSE: COP), EOG Resources (NYSE: EOG), and Schlumberger (NYSE: SLB).
The Consumer Discretionary sector, one of the strongest performers in 2018, returned 15.4% in Q1. 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).
Communication Services, which has only been a separate category for about nine months, just edged out the S&P 500’s performance with a return of 13.5% This sector includes diversified telecommunication services, wireless telecommunication services, media, entertainment, and interactive media & services. Components include Facebook (NSDQ: FB), Alphabet (NSDQ: GOOGL), and AT&T (NYSE: T).
The other five sectors lagged the S&P 500 during the quarter.
The Consumer Staples sector turned in a Q1 return of 11.1% return. 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 make up this sector. Component stocks include Proctor & Gamble (NYSE: PG), Philip Morris International (NYSE: PM), and Coca-Cola (NYSE: KO).
The Utilities sector returned 10.7% for the quarter. However, this sector is the second-best performing sector over the past year, with its 19.1% barely trailing the Real Estate sector. 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).
The Materials sector rose 10.3% in Q1. 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).
Only two sectors returned single digits for the quarter.
Financials gained 8.5% during the quarter, but have lost 4.9% over the past 12 months. In addition to banks, this group includes financial services firms, insurance companies, and consumer finance companies. Major companies include Berkshire Hathaway (NYSE: BRK.B), JPMorgan (NYSE: JPM), and Citigroup (NYSE: C).
Health Care was in last place in Q1, but even that was good for a 6.5% gain. Health Care has been a top-performing sector for years, and is up 14.5% over the past year, which is fourth best among all sectors. This 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).
Playing The Late-Cycle Stage
If you attempt to time your investments according to the business cycle, the economy is presently in the late-cycle stage, where economic growth rates start to slow as credit tightens. Recession typically follows the late-cycle phase, and some recession indicators have been flashing.
The consistent overperformers during the late-cycle are defensive and inflation-resistant sectors: the energy sector, the health care sector, and the materials sector. Of these, only the energy sector outperformed the S&P 500 during the first quarter, although the health care sector has outperformed the S&P 500 over the past year. Thus, the material sector may be becoming a relatively better value.
The utilities and the consumer staples sectors generally outperform during the late business cycle, but they are also consistent outperformers during the recession phase. Of note, both sectors outperformed the S&P 500 over the past year, although both lagged the index in Q1.
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