The 3rd quarter was one that saw an obviously quite strong continuation of Q2 trends in general, but the performance wasn't as uniform as in the 2nd quarter. As you can see in the table below, which allows us to look across capitalizations by sector, there were some stellar performers as well as some really weak areas. I have color-coded the entries to reflect relative performance of the sector to the overall index price return, with a 5% differential for Q3 and a 7% differential for the YTD:
Looking at the S&P 500, Energy stocks did poorly and remain one of the weaker groups YTD. Clearly, this weakness is confined to the very largest companies, as Mid-Cap and Small-Cap Energy companies flew this quarter and are among the better performing sectors in 2009 for the S&P 400 and the S&P 600. I pointed out this opportunity earlier this year but admit to jumping off the bandwagon way too early. In any event, the weakness in the S&P 500 Energy stocks is quite misleading, as the median returns on the quarter and YTD respectively are 19% and 37.5%. The issue is that 3 of the largest members, all integrated oil companies and representing currently over 1/2 the market cap of the sector, are still down YTD.
Materials had a great quarter across the board, and the sector is one of the strongest thus far in 2009. Not a single stock declined on the quarter. This sector is highly leveraged typically, and it looks like the best names this quarter and this year are the ones that performed the worst last year.
Industrials performed better for Large-Caps than the smaller companies, with 10 of the 56 names, including the very largest, General Electric (GE), up in excess of 40%. Interestingly, the sector remains a laggard YTD, especially in Small-Caps. I believe that there may be an opportunity in some of the smaller names and have my eyes on a few. One factor may be the recent weakening in the dollar leading to some macro trades that have helped bigger stocks but not the smaller ones.
Consumer Discretionary, which was so hot early in the year, did a nice job in essentially keeping pace to slightly outperforming. Some of 2008's biggest dogs continue to put up very strong returns. It is very clear in the chart below that the bigger the fall, the higher the bounce:
Healthcare was relatively weak in all market caps and remains far behind the benchmarks on a YTD basis. I have a very high weighting towards Small-Cap Health and am hopeful that this sector becomes better appreciated for its strong balance sheets and potential growth.
Financials were the best Large-Cap sector. While the smaller companies did well during the quarter, they remain very weak on a YTD basis. Representing over 17% of the total index, S&P 600 Financial stocks could be ready to play some catch-up this quarter, as they are down YTD still.
What can one say about Technology? The sector kept pace during the quarter and remains exceptionally strong on the year. With strong balance sheets and high international exposure, it's not surprising that the sector continues to draw a lot of focus.
Telecommunications Services, outside of the S&P 500 members, is a tiny component of the indices.
Utilities have been poor performers across market capitalizations. In addition to higher Treasury rates this year, there has been some concern about regulation.