The books are closed on the first quarter of 2022. It was a quarter still dominated by supply chain disruptions and the prospect of rising inflation. Overall, it was the worst-performing quarter since the great meltdown in Q1 2020. It would have been worse, except for a two-week rally in March at the end of the quarter.

The S&P 500 was down 4.9% for the quarter. The downturn was widespread, with nine of 11 S&P 500 sectors reporting negative returns for the quarter. The only exceptions were the energy sector and the utilities sector. Oil and gas prices soared in the quarter, and that led to a phenomenal 39% return for the energy sector. Utilities were far back in second place with a 4.7% return. The communication services sector was in last place, with a -11.2% return.

Let’s dissect Q1 2022 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.

The Energy sector’s performance was in an entirely different category from the other sectors in Q1. Further, Energy also is by far the top performer of the past 12 months, with a total return over that time of 63%. Chevron (NYSE: CVX), ConocoPhillips (NYSE: COP), EOG Resources (NYSE: EOG), and Schlumberger (NYSE: SLB) are major components of the energy ETF.

The Utilities sector has now outperformed the S&P 500 for two consecutive quarters. The main headwinds for the sector continue to be inflation fears and rising bond rates, but investors have flocked to defensive sectors in recent months. 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).

Another defensive sector, Consumer Staples, was down 1.1% for the quarter, but still outperformed the market averages. 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 Financial sector had a great 2021, but it wasn’t immune from the Q1 2022 downturn. The sector lost 1.5% in Q1, but that was still good enough to make it the fourth best-performing sector of the 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 Chase (NYSE: JPM), and Citigroup (NYSE: C).

The Materials sector was the fifth best performer for the quarter with a return of -2.3%. The sector was also the third-best performer in Q4. 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 Industrials sector turned in a nice 2021 return of 21.1%, but gave up 2.4% in Q1. Component industries include building products, construction and engineering, electrical equipment, conglomerates, machinery, and aerospace/defense.

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Important constituents of the Industrials sector include Boeing (NYSE: BA), 3M (NYSE: MMM), and Honeywell (NYSE: HON).

The Health Care sector was the final sector to outperform the S&P 500 in Q1, with a return of -2.5%. The 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).

The Real Estate Index was 2021’s second-best performer with a return of 46.1%, and the best performer in Q1. But it was the first of the underperformers in Q1 with a return of -6.2%. This index consists primarily of real estate management and development companies and real estate investment trusts (REITs). Simon Property (NYSE: SPG) and American Tower (NYSE: AMT) are among the largest representatives of this group.

Technology was the second-best performing sector in Q4, but it significantly underperformed in Q1 with a return of -8.4%. At one point the technology-heavy NASDAQ Composite Index had fallen into bear market territory, down 20% from the highs set in November. 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 Consumer Discretionary sector had beaten the S&P 500 for two consecutive quarters, but it turned in a dismal Q1 with a return of -9.4%. 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).

Finally, Communication Services followed up its negative return in Q4 and last place finish in 2021 with another last place return for Q1 2022. It was the only sector in the S&P 500 with a double digit loss, down 11.2%. This sector includes diversified telecommunication services, wireless telecommunication services, media, entertainment, and interactive media and services. Components include Facebook (NSDQ: FB), Alphabet (NSDQ: GOOGL), and AT&T (NYSE: T).

In summary, it’s hard to find much to be happy about unless you are disproportionately invested in the energy sector. Nearly every sector was a loser, and the S&P 500 turned in its worst performance in two years. Unless energy prices come down, this pattern is likely to continue. Many sectors will face the headwinds of high energy prices, although the energy sector itself will continue to do quite well.

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