The third quarter of 2022 is officially over. The market got off to a strong start in July but then negative sentiment from the Federal Reserve — followed by yet another interest rate hike and promises that there are more to come — brought that rally to a swift end. The market remains entrenched in the worst bear market in over a decade.

Nine of eleven sectors were down in Q3, and year-to-date (YTD) only one sector has a positive return. The S&P 500 was down 5.3% for the quarter, and is now down 24.8% on the year.

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Let’s dissect Q3 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 top performer for the quarter, Consumer Discretionary, has been one of the worst performers YTD. But at least for Q3, it bounced upward with a 3.8% return. 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 Energy sector’s eked out a 1.8% return, but YTD it’s in a class of its own with a total return of 33.9%. It is the only sector in positive territory YTD. Chevron (NYSE: CVX), ConocoPhillips (NYSE: COP), EOG Resources (NYSE: EOG), and Schlumberger (NYSE: SLB) are major components of the energy ETF.

The Financial sector outperformed the S&P 500 in Q3, but was nevertheless down by 3.0%. 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 Chase (NYSE: JPM), and Citigroup (NYSE: C).

Not far behind was the Industrials sector, with a -4.7% return in Q3. Component industries include building products, construction and engineering, electrical equipment, conglomerates, machinery, and aerospace/defense. Important constituents of the Industrials sector include Boeing (NYSE: BA), 3M (NYSE: MMM), and Honeywell (NYSE: HON).

The Health Care sector is historically a “recession-proof” sector, and it did outperform the S&P 500 in Q3. 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).

Utilities are the second-best performing sector YTD, but underperformed the S&P 500 in Q3 for the first time in the past four quarters. The main headwinds for the sector continue to be inflation fears and rising bond rates. 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 led the S&P 500 into bear market territory, and remains the second-worst performing sector YTD. 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).

Consumer Staples, another defensive sector, is the third-best performing sector YTD. However, it gave up 6.9% in Q3. 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 Materials sector was the final single-digit loser for the quarter, with a decline of 7.1%. 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 was a double-digit loser in Q3, down 11.1%. That also drops it behind the S&P 500 YTD. 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.

Communication Services Communication Services seems to have no bottom. The sector now has three consecutive quarterly double-digit losses. 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).

As I said last quarter, it was still a bit too early to see any light at the end of the tunnel. But bear markets tend to end when the last of the bulls have capitulated. I have seen even season investors get spooked by the current market, so it feels like capitulation is near. Maybe not in Q4, but as soon as the news from the Fed becomes more neutral, the markets should rally.

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