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Is Energy In a Secular Decline?

Energy is the worst performing sector in the S&P 500 this year and has come under increasing pressure over the past few months as the price of Crude has plummeted to $75 a barrel.

The underperformance this year has been significant, but the shift really started years ago, back in the middle of 2008 when Crude hit its peak at $147 a barrel. Prior to that point, Energy had been a leading sector since 2000.

The chart below displays a ratio of the Energy sector to the S&P 500 in the top panel with the price of Crude in the bottom panel. As you can see, the trajectory of Energy’s relative performance has been closely related to the direction Crude.

En1

Crude is down over 25% this year and has moved in almost a straight line lower since late June.

En4

Prior to this recent move lower Energy had actually been the best performing sector in the S&P 500 since data became available in 1989.  Therefore, we may be seeing a bit of mean reversion at play as well. Energy has since moved into the second spot with Health Care taking the lead.

En2

Here are the annualized return figures for each of the 10 S&P 500 sectors.

En3

Where is Energy headed next? Look to the direction of Crude as a short-term guide, but longer-term we may be in the middle of a secular decline on a relative basis. Such a decline would have an impact not only on the financial markets but the global economy as well. Determining who the winners and losers will be under such a scenario will be an important factor for investors to consider.

This writing is for informational purposes only and does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction, or as an offer to provide advisory or other services by Pension Partners, LLC in any jurisdiction in which such offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Pension Partners, LLC expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing.

CHARLIE BILELLO, CMT

Edward M. Dempsey Pension Partners New York

 

 

 

 

 

Charlie Bilello is the Director of Research at Pension Partners, LLC, an investment advisor that manages mutual funds and separate accounts.  He is the co-author of two award-winning research papers in 2014 on Intermarket Analysis and investing. Mr. Bilello is responsible for strategy development, investment research and communicating the firm’s investment themes and portfolio positioning to clients. Prior to joining Pension Partners, he was the Managing Member of Momentum Global Advisors, an institutional investment research firm. Previously, Mr. Bilello held positions as an Equity and Hedge Fund Analyst at billion dollar alternative investment firms, giving him unique insights into portfolio construction and asset allocation.

Mr. Bilello holds a J.D. and M.B.A. in Finance and Accounting from Fordham University and a B.A. in Economics from Binghamton University. He is a Chartered Market Technician (CMT) and a Member of the Market Technicians Association. Mr. Bilello also holds the Certified Public Accountant (CPA) certificate.

You can follow Charlie on twitter here.

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