The first half of the year is now in the books. Following its best quarterly performance in nearly 10 years in the first quarter, the S&P 500 returned a more modest 3.8% in the second quarter. For the first half of 2019, the S&P 500 returned 17.3%.

According to the Select Sector SPDR exchange-traded funds (ETFs) that divide the S&P 500 into sector index funds, every sector gained in the first half of the year. However, there were steep sell-offs during the second quarter in crude oil and natural gas. The price declines caused the energy sector to decline in the second quarter; the only sector to see a second quarter decline.

Let’s dissect the first half and second quarters of 2019, sector-by-sector. I’ll also provide insights on how you should position your portfolio for the rest of the year.

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.

Five sectors outperformed the S&P 500 during the first half of 2019.

Technology was the half’s biggest winner, with a gain of 26.8%. 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).

The Industrial sector continued its resurgence, with a first half gain of 21.4%. 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 Consumer Discretionary sector continued its strong performance from 2018, returning 21.2% in the first half. 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 Real Estate Index, consisting primarily of real estate management and development companies and real estate investment trusts (REITs), was the final member of the >20% club in the first half with a return of 20.2%. Simon Property (NYSE: SPG) and American Tower (NYSE: AMT) are among the largest representatives of this group.

Communication Services, which has only been a separate category for a year now, was the final member to outperform the S&P 500 with a return of 19.7% 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).

Financials gained 17.1% during the quarter, but this sector was the top-performing sector in the second 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 Materials sector rose 17.0% in the first half. 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 Consumer Staples sector turned in a first half return of 15.9%. 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 was one of the laggards of the first half, with a 14.4% return. It also lagged the S&P 500 during the second quarter. However, the utilities sector is the top-performing sector over the past year, with a total return of 18.6%. 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 Energy sector was another laggard during the first half, with a total return of 13.0% (and a strong Q1). However, the energy sector has seen two abysmal quarters over the past year on the back of volatile oil and gas prices. Energy is the only sector of the S&P 500 with a negative return over the past year. 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 Health Care sector was in last place for the first half with a 7.9% gain. Health Care has been a top-performing sector for years, and is up 12.8% over the past year, which is fifth best among all sectors. This 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).

Playing The Late-Cycle Stage

If you attempt to time your investments according to the business cycle, the economy is presently in the late-cycle stage, where economic growth rates start to slow as credit tightens. Recession typically follows the late-cycle phase, and some recession indicators have been flashing.

The consistent overperformers during the late-cycle are defensive and inflation-resistant sectors: the energy sector, the health care sector, and the materials sector.

None of these sectors outperformed the S&P 500 during the first half, although the materials sector outperformed the S&P 500 in the second quarter. In my report card following the first quarter I noted that “the material sector may be becoming a relatively better value.”

This time, I will note that energy seems to be becoming a relatively better value given its recent underperformance and the present business cycle stage. Health care would be a close runner up.

The utilities and the consumer staples sectors generally outperform during the late business cycle, but they are also consistent outperformers during the recession phase that often follows. Of note, both sectors outperformed the S&P 500 over the past year, although both lagged the index in the first half.

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