The first quarter of 2021 closed last week, so it’s time to take a look at quarterly sector performance. For reference, the S&P 500 returned 5.8% for the first quarter. But the first quarter saw a broad-based rally, with every sector turning in a positive return.
Let’s dissect the Q1 2021 performance, sector-by-sector. Note that all returns discussed here are total returns, which include the effect of dividends paid during the year.
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.
After a tough 2020 that saw the sector go into deeply oversold territory, the energy sector grossly outpaced the other S&P 500 sectors to end the year. It started off 2021 the way it ended last year. Following a 28.2% return in Q4 2020, the energy sector reeled off a 30.8% return in Q1 2021. The Energy Select Sector SPDR Fund (XLE) has now returned 78% in the past 12 months.
Some of the energy sector’s biggest components are ExxonMobil (NYSE: XOM), Chevron (NYSE: CVX), ConocoPhillips (NYSE: COP), EOG Resources (NYSE: EOG), and Schlumberger (NYSE: SLB).
The Financials sector also suffered in 2020 in the wake of the March economic meltdown. But it closed 2020 with a double-digit Q4, and now opens 2021 with a first quarter return of 16.0%. 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 Industrials sector was the final sector in the double-digit club for Q1, gaining 11.5%. 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).
The Materials sector wasn’t that far behind with a return of 9.3%. Further, this sector leads all sectors over the past 12 months, just edging out the energy sector with a 12-month return of 78.4%. 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 Real Estate Index, consisting primarily of real estate management and development companies and real estate investment trusts (REITs), got hit especially hard by the pandemic as tenants struggled to pay rents in 2020. The sector was down in 2020, but opens 2021 with a first quarter gain of 9.1%. Simon Property (NYSE: SPG) and American Tower (NYSE: AMT) are among the largest representatives of this group.
Communication Services was the final sector to outperform the S&P 500 in Q1, with a gain of 8.8% for 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 Consumer Discretionary sector has had three strong years in a row, but underperformed the S&P 500 in Q1 with a return of 4.7%. 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 Health Care sector underperformed last year as profitable elective surgeries declined during the pandemic. That underperformance has extended into this year, as the sector returned only 3.3% for the quarter. 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).
Next was the Utilities sector, which eked out a 2.9% return for the quarter. The main headwinds for the sector are inflation fears and rising bond rates. However, the sector has one of the highest yields of any S&P 500 sector at 3.1%, trailing only Energy (4.1%) and Real Estate (3.3%).
This sector was also uncharacteristically more volatile than the S&P 500 in 2020. 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).
Technology is generally near the top of these rankings, and it was the biggest winner of 2020 with a gain of 43.6%. But it was a laggard in Q1, with a return of just 2.4%. 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).
In last place for Q1, but still with a positive return, was the Consumer Staples sector with a return of 1.8%. 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).
In summary, it’s not a bad quarter at all when the worst-performing sectors are still in positive territory. Let’s just keep our fingers crossed that this year’s Q2 looks nothing like last year’s Q2.
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