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LumiNola/E+ via Getty Images Investment Approach Market Review For the three months ending September 30, 2024, the materials sector, as measured by the MSCI U.S. IMI Materials 25/50 Linked Index, gained 10.
20%, while the broad-based S&P 500® index posted a 5.89% increase. U.
S. stocks were driven by resilient corporate profits, the promise of artificial intelligence and the U.S.
Federal Reserve's long-anticipated pivot to cutting interest rates. Amid this favorable backdrop for higher-risk assets, the S&P 500® continued its late-2023 momentum and ended September at its all-time closing high. The shift toward global monetary easing gained steam when the Fed lowered its benchmark federal funds rate after a historic hiking cycle that began in March 2022 to combat persistently high inflation.
On September 18, the central bank cut rates by 0.50 percentage points, opting for a bolder start in making its first rate reduction since March 2020. The Fed has projected the equivalent of two more quarter-point cuts this year.
Within the S&P 500, the materials sector outpaced, finishing fifth among the index's 11 sectors. The top-performing sector was utilities (+19%), which benefited from its key role in providing the electricity needed to power massive data centers used for AI. Real estate (17%), industrials (+12%), financials (+11%), consumer staples (+9%), consumer discretionary (+8%), and health care (+6%) all topped the broader market as well.
Meanwhile, energy (-2%) lagged most, while a rotation out of mega-cap growth stocks stunted information technology and communication services (+2% each). The largest industry group in the MSCI materials sector index, specialty chemicals, gained about 12% for the quarter, while the second-biggest segment, industrial gases, grew 11%. Among other sizable industry components, gold (+26%) fared best; construction materials (+12%) and paper & plastic packaging products & materials (+12%) also outperformed; the fertilizers & agricultural chemicals group (+10%) was in the middle of the pack; and commodity chemicals (+5%), copper (+3%) and steel (-1%) trailed.
Performance Review For the quarter, the fund's Retail Class shares returned 5.53%, underperforming the 10.20% advance of the sector index, the MSCI U.
S. IMI Materials 25/50 Linked Index, and the 5.89% gain of the broad-based S&P 500® index.
Versus the sector index, stock selection in specialty chemicals and gold, and positioning in commodity chemicals, were the largest detractors. A large underweight in paint and coating company Sherwin-Williams ( SHW ) (+28%) was the biggest individual detractor. In July, the company reported flat sales but stronger-than-expected profitability for Q2.
That helped boost the stock, and it was further bolstered in August and September by the anticipation of Fed rate cuts, which helped lift numerous housing-related stocks in Q3. We added Sherwin-Williams to the portfolio toward the end of the quarter. Not holding Newmont ( NEM ) (+28%), the world's largest gold-mining company and a major index component, also hurt.
Gold stocks performed poorly in 2023 – even as the price of gold itself rose – due largely to rising costs and production challenges for gold-mining companies. But as prices for gold have continued to soar in 2024, the miners have begun to benefit from the increased demand as well. We still don't feel the fundamentals for gold miners are great but, given current market dynamics, this quarter we modestly increased the fund's allocation to be closer to neutral with the index.
In contrast, avoiding LyondellBasell Industries ( LYB ) (+2%), a multinational commodity chemicals firm, was the top contributor to the fund's relative result. In early August, the company's quarterly results came in slightly better than expected, helped by lower prices for natural gas, which is a key feedstock for chemicals firms. But the results were not enough to move the needle much for the company, whose sales have been sluggish in recent quarters.
Lastly, an overweight in silver miner Hecla Mining ( HL ) was the next-biggest relative contributor, as the stock gained about 38% amid sharply rising prices for silver. Outlook and Positioning As October begins, markets enjoy favorable momentum and easier financial conditions. Consumer spending and economic output have expanded steadily this year, but the labor market has shown a pronounced cooling trend, with rising unemployment, fewer job postings and weak consumer sentiment about job conditions.
The U.S. Fed and the Bank of England cut their policy rates in Q3, while the Bank of Canada and the European Central Bank dropped their rates further.
As of September 30, futures markets reflect expectations for a large, sustained drop in policy rates in the next 12 months. Japan remained the outlier by hiking rates. Over the past 12 months, the materials sector gained about 25%, as measured by the MSCI sector index, versus the S&P 500's roughly 36% advance.
But in the past three months, the sector significantly outperformed the broad-market index. Materials is among the most cyclical and rate-sensitive of the 11 sectors in the S&P 500; if U.S.
policy interest rates continue to fall over the coming months and in 2025, as is expected, we believe the sector has the potential to continue outperforming the larger market. We continue to emphasize the industries we think have the strongest supply demand profiles. The industrial gases group, at 24% of total fund assets at quarter end, was the portfolio's biggest industry allocation and No.
3 overweight. In our estimation, companies in this group have an attractive mix of defensive qualities – with steady, reliable earnings growth and strong pricing power – and the ability to participate in an economic recovery. Larger-than-index positions included Linde ( LIN ), the portfolio's top holding.
The fund also owned Air Products & Chemicals ( APD ), which was another top-five holding as of September 30. We modestly reduced the position in Linde but increased our stake in Air Products & Chemicals. At quarter's close, the commodity chemicals segment was the third-biggest industry weighting and largest overweight.
However, we notably reduced the allocation during the quarter. Within this group, the U.S.
-based global chemical giant Dow ( DOW ) was by far the top holding - as of September 30, it was the fund's third-largest holding and biggest overweight. We also held larger-than-index positions in Tronox Holdings ( TROX ), Cabot ( CBT ) and Westlake ( WLK ). The fund's second-largest industry overweight at the end of the quarter was in diversified metals & mining, driven mostly by a sizable non-benchmark stake in Ivanhoe Mines ( OTCQX:IVPAF ), whose top business is copper.
We like the longer-term prospects for copper, another of the portfolio's largest industry overweights. The metal is widely used in the production of electric vehicles and equipment that produces wind and solar power. Among copper names, the fund owned a non-index position in First Quantum Minerals ( OTCPK:FQVLF ), as well as an overweight in Freeport-McMoRan ( FCX ), which was the portfolio's fifth-largest holding at quarter end.
We added to the position in First Quantum and reduced the stakes in Ivanhoe Mines and Freeport-McMoRan this quarter. Specialty chemicals, in contrast, ended September as our largest industry underweight. The biggest stake within this group was water treatment company Ecolab ( ECL ) – the fund's second-largest position and overweight – while notable non-holdings among benchmark components included Albemarle ( ALB ), PPG Industries ( PPG ) and International Flavors & Fragrances ( IFF ).
As a reminder, fund holdings tend to be driven by our conviction in individual stocks, and not by trying to match sector allocations versus the MSCI index. Thank you for your confidence in Fidelity's investment-management capabilities. Original Post Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.
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