Friday marked the end of the second quarter and the half-way point of the year. With that in mind, we thought it would be worth looking at the index and sector performance from the second quarter and the first half of the year as well.
After a very choppy and back and forth first quarter, the second quarter saw more of a consistent upward trend. It wasn’t a huge trend, but it was upward in slope never the less. All four of the main indices gained ground in the quarter with the Russell 2000 gaining 7.43% to lead the way. There were a couple of factors that likely led to small caps outpacing the other universes of companies.
Smaller firms benefitted from the tax cuts just as much as their larger rivals, they weren’t as concerned with the effects of the tariff talks, and the stronger dollar has less of an impact if you don’t export as much.
The Nasdaq gained 6.33% during the second quarter and is up 8.79% for the year. The S&P gained 2.93% for the second quarter and 1.67% for the first half. The Dow gained ground in the second quarter (0.7%), but is in negative territory for the year with a loss of -1.81%. With industrial companies representing a higher weighting than the other indices, the Dow has been hurt more than the other indices due to the trade dispute hanging over the markets.
Turning our attention to the sector performance, the ongoing trade disputes made an impact there as well. Seven of the ten main sectors gained ground during the second quarter with the energy sector leading the way with a gain of 13.4%. Almost all of the gain came in April, but after OPEC agreed to boost output levels a few weeks ago, we saw a little jump as well.
The consumer discretionary sector had the second best quarterly performance with a gain of 8.19% and it leads the way on a year to date basis with a gain of 11.37% for the first half. The second best performance for the first half belongs to the tech sector with a gain of 9.36% and that is after gaining 6.57% in the second quarter.
Where the trade dispute comes in to play is on the downside. There were three sectors that were in the red for the second quarter and two of the three are at the center of the tariff war—industrials and consumer staples.
The industrial sector was the worst performing sector with a loss of 3.19% for the quarter. It is also one of the five sectors that are down on a year to date basis. When the Trump administration started talking about putting tariffs on goods from Canada, China, Mexico, and the European Union, the immediate counter threat from the other parties was to place tariffs on U.S. goods that enter their country. Many of those products are industrial goods like industrial equipment, construction equipment, and heavy trucks. This is a major factor for the industrial sector being the biggest laggard during the second quarter.
The consumer staples sector was the third worst performer (-1.33%) during the second quarter and it is the worst performing sector on the year with a loss of 8.21%. The sector is getting hit from both sides when it comes to the tariff war. The costs of packaging goods like aluminum and steel are two materials the administration is proposing a tariff on. This would mean an increase in costs and at a time when these companies are already facing pricing pressures. They are also getting hit by the retaliatory tariffs being proposed. Goods like packaged meats, whiskey, and peanut butter are being targeted.
Another factor that is hurting these companies is the stronger dollar. Over the last few months, the dollar has been gaining value against most other currencies and that means exports from the U.S. become more expensive in the local currency. Many of the blue chip names in the consumer staples are heavy exporters.
Looking ahead to the third quarter, it is hard to speculate which sectors will perform the best and which ones will perform the worst. The trade negotiations are weighing heavily on certain sectors and until there is some sort of compromise, that will continue to be the case. If the proposed tariffs by each side do get implemented, the industrial sector and the consumer staples sectors will be two of the worst performers in the months ahead. One sector that should hold up relatively well under those circumstances would be the utilities sector.