Third Quarter Sector Report Card
The economy remains mired in a COVID-19 recession, but the market recovery that started in the second quarter continued through the third. One exception was the energy sector, which gave up a large chunk of its huge second quarter gains.
The S&P 500 followed the 20% rise in Q2 with a gain of 8.5% in Q3. Every sector turned in a gain during the quarter, with the notable exception of the energy sector.
Let’s dissect this quarter, sector-by-sector.
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.
The Consumer Discretionary sector was the best performer in Q3 with a return of 15.3%. It is also the second-best performer of the year with a return of 18.3% year-to-date (YTD). 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 Materials sector rose 13.5% in the second quarter, which was enough to finally put this sector in positive territory for the year. This sector is up 5.4% YTD. The 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 Industrial sector returned 12.5% for the quarter, but remains down 4.0% YTD. 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).
Technology has been the biggest winner of the year, with a YTD return of 28.6%. The sector was the fourth best performer of the quarter with an 11.9% return. 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).
Communication Services turned in a quarterly return of 10.2%. The sector is also the third-best YTD performer with a return of 11.5%. 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 Consumer Staples was the final member to outperform the S&P 500 with a return of 10.0%. This sector continues to be the least volatile of all sectors since the pandemic started. 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 Utilities sector performed a bit better than it did in Q2, returning 6.1%. However, the sector remains down 5.6% YTD. 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 Health Care sector is slowly coming back as elective surgeries are beginning to pick up. This sector returned 5.8% for the quarter, and is now up 4.9% YTD. 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).
Financials continue a slow recovery after getting hit hard in Q1. For the quarter the sector was up 4.6%, but it’s still the second-worst performer YTD with a decline of 20.2%. 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 Real Estate Index, consisting primarily of real estate management and development companies and real estate investment trusts (REITs), continues to struggle in the wake of the pandemic. The sector gained 1.9% for the quarter, but is still down 6.8% year-to-date. Simon Property (NYSE: SPG) and American Tower (NYSE: AMT) are among the largest representatives of this group.
Following the deep sell-off in Q1, the Energy sector had the strongest performance in Q2 with a 31.9% return. But Q3 brought more bad news as energy demand remained soft. The Energy sector was the only sector to record a loss in Q3, but it was a big one at 19.6%. The energy sector is now down 47.5% YTD%. 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 market, with the exception of the energy sector, continues to project a return to normal. But with the impending election, President Trump now fighting a COVID-19 infection, and uncertainty around further stimulus, the fourth quarter could be a wild ride.
Many energy sector names are cheaper than they have been in a decade, but bearish sentiment is likely to remain in this sector well into next year. It seems as if investors have become permanently bearish toward the energy sector and permanently bullish toward the technology sector. We’ll see if that dynamic can last.
Editor’s Note: Robert Rapier just reviewed sector-by-sector performances in the third quarter. As Robert makes clear in the above article, you need to brace your portfolio for continued volatility in the fourth quarter. Investors probably face a roller coaster in the final months of the year.
Our mutual colleague Dr. Stephen Leeb understands these risks as well as anyone, which is why he’s been guiding his subscribers to win after win in any market environment.
Dr. Leeb, chief investment strategist of The Complete Investor, has coined a term for the stock market’s recent ups and downs. He calls it “Reset 2020,” and he believes it signals a paradigm shift in how equities will be valued in the years to come. To learn more about this shift and how to profit from it, click here for our special report.