Worst First Quarter Ever: A Sector Review
It’s hard to believe how rapidly the markets have changed since the end of 2019. Following an S&P 500 return of 8.5% in Q4 2019, the new year began with a lot of optimism.
Add one global pandemic to the mix, and everything has changed. As it became clear that the COVID-19 pandemic would be extraordinarily disruptive to the markets, they melted down at the fastest rate in history. Many companies in the S&P 500 are now trading at their lowest valuations in years.
The Dow Jones Industrial Average fell roughly 23% in Q1 (the worst overall quarter for the Dow since 1987), and the S&P 500 dropped 20% (its worst quarterly decline since 2008). Overall, it was the worst first quarter ever for both the Dow and S&P 500.
The first quarter decline was broad-based. Every sector that makes up the Select Sector SPDR exchange-traded funds (ETFs) that represent the S&P 500 was down by double-digits. The energy sector was crushed by the market sell-off and shed a staggering 50.5%, amid the largest energy demand destruction in history and a price war instigated by Russia.
Let’s dissect this ugly quarter, sector-by-sector.
11 Sector Review
Select Sector SPDRs are targeted 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.
After chalking up the top performance of 2019 with a gain of 49.9%, Technology was the best of the losers in Q1. The sector did sell off steeply during the quarter, but closed the quarter with a decline of 11.9%. It is also one of only two sectors that are still in positive territory over the past 12 months, with a gain of 8.8%.
The Technology 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). Below, I’ll steer you toward an exceptional investing opportunity in the tech space.
The Health Care sector wasn’t far behind the Technology sector in Q1, with a 12.6% quarterly decline. It’s probably not surprising that this sector held up relatively well during a global health crisis. The Health Care 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 Consumer Staples sector was in third place with a return of -13.0%. It is the only sector besides Technology with a positive return over the past 12 months (+0.1%). 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 Proctor & Gamble (NYSE: PG), Philip Morris International (NYSE: PM), and Coca-Cola (NYSE: KO).
The Utilities sector initially held up well as the market sold off, but once panic set in this sector sold off as well. Nevertheless, it did hold up better than the broader markets with a quarterly decline of 13.4%. 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).
Communication Services declined 17.3% during the quarter. 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 Real Estate Index, consisting primarily of real estate management and development companies and real estate investment trusts (REITs), just edged out the S&P 500 with a decline of 19.2% for the quarter. Simon Property (NYSE: SPG) and American Tower (NYSE: AMT) are among the largest representatives of this group.
The Consumer Discretionary sector, however, underperformed the S&P 500 with a quarterly decline of 21.4%. This sector includes industries such as automobiles and components, consumer durables, apparel, hotels, restaurants, leisure, media, and retailing.
Several of these segments (e.g., restaurants, hotels, and leisure) have been hit especially hard during the pandemic, while others held up well (e.g., online retailers). This sector is comprised of companies such as Amazon (NSDQ: AMZN), Home Depot (NYSE: HD), and Walt Disney (NYSE: DIS). The latter was particularly hurt during the quarter due to park closures in response to the pandemic.
The Materials sector declined by 26.2%. 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).
The Industrials sector declined by 27.0% as manufacturing ground to a halt in some areas. Component industries include aerospace and defense, building products, construction and engineering, electrical equipment, conglomerates, and machinery. Important constituents of this sector include Boeing (NYSE: BA), 3M (NYSE: MMM), and Honeywell (NYSE: HON).
Financials were hit hard, declining by 31.8% during the quarter. 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 (NYSE: JPM), and Citigroup (NYSE: C).
The Energy sector was in a class by itself with a decline of 50.5% for the quarter. Given the multiple uncertainties in the energy sector, this remains a very dangerous market for investors. Some of the energy sector’s biggest holdings are ExxonMobil (NYSE: XOM), Chevron (NYSE: CVX), ConocoPhillips (NYSE: COP), EOG Resources (NYSE: EOG), and Schlumberger (NYSE: SLB).
The first quarter was tough, but investors are expecting things to get worse before they get better. The S&P 500 ended Q1 at 2,585, but Goldman Sachs (NYSE: GS) has estimated the bottom of this down-cycle at 2,000. If GS is correct (and I suspect they are right that there is still significant risk), that would imply ~20% more downside in this market.
A recent survey by Boston Consulting Group found that 60% of investors are bearish for the rest of 2020, with 55% saying they expect the severe impact of the crisis to be over by the end of Q3. But 87% do not see a quick bounce back for the economy.
It’s only April but this is a year in the market that we will be glad to see in the rear view mirror. Take care of your health and be very cautious in this dangerous market.
Editor’s Note: Our colleague Robert Rapier just explained the dismal sector-by-sector performance of the first quarter. Where can you turn for profits in the future?
Over the long haul, the biggest stock market winners are companies that defy the status-quo and introduce disruptive new technologies that create entirely new industries and products. As Robert explained, the tech sector fell in Q1 but weathered the downturn comparatively well. We expect tech to not only survive COVID-19, but skyrocket once the pandemic is behind us.
Imagine if you had been able to invest in Apple or Google during their infancy. The emergence of 5G wireless technology represents a similar window of opportunity, especially with tech stocks now trading at deep discounts.
Want details on how to profit from 5G? Click here for our technology report.