Energy Surge Relative to Industrials

Each day in our Sector Snapshot, we provide an update on each sector’s weighting within the S&P 500.  Given the astounding rally in Energy stocks, the sector has gone from a record low weighting of only 1.9% in November 2020 up to a high of 4.9% last week. That is back to levels seen in the summer of 2019, and it’s also a level consistent with what we saw in the late 1990s through the first few years of the 2000s. Of course, the larger a sector’s weighting, the more impact its moves have on the broader S&P 500.

Meanwhile, another traditionally cyclical group, the Industrials, has seen its weighting steadily decline. At only 7.76%, the current reading is only about 0.3 percentage points above the pandemic low in weight which also marked a record low going back to at least 1990.  Historically, Industrials have had less dramatic fluctuations in weight than Energy, but it has seen a consistent grind lower over the decades, reflecting the broader shift in the US economy from predominately goods to service-based.

Energy vs Industrials Stocks

In an earlier post, we noted how two of the biggest stocks in the Energy sector by market cap, Exxon Mobil (XOM) and Chevron (CVX), have seen explosive and unprecedentedly large moves higher over the past couple of years.  This is the first time these stocks have seen their market caps rise in any sort of a significant manner since the mid-2000s.  As shown below, the two now account for nearly three-quarters of a trillion dollars in market cap, surpassing the previous peak in late 2007. That accounts for roughly 44% of the total size of the S&P 500 Energy sector as well.

Below we compare the combined market caps of XOM and CVX to what have historically been two of the most prominent stocks in the Industrials sector: Boeing (BA) and General Electric (GE).  Right around 2000, these two stocks had a combined market cap of ~$650 billion.  Over the two decades since then, these two stocks have fallen from grace with their current market caps now totaling just $163.9 billion!  Relative to the market cap gains of Exxon Mobil and Chevron, the recent move has been nothing short of exponential as shown in the second chart below.  The only comparable period was in 2009 when both groups fell, but the Industrial names were hit much harder.

As we discussed in regards to Tech stocks now versus the Dot Com Peak in March of 2000 in last week’s Bespoke Report (pages 20 & 21), the big declines in the size of GE and BA as XOM and CVX rocket higher are yet more examples of the ebb and flow of market leadership.  Click here to learn more about Bespoke’s premium stock market research service.

XOM, CVX, GE, BA

Massive Sector Performance Spreads

There’s no questioning that the equity market has been extremely volatile this year. So far in 2022, the S&P 500 has averaged an absolute daily move of 121 basis points (bps). Although the broader index has been incredibly weak over the last 100 trading days (down 17.1%), performance among individual sectors has diverged widely, as Energy has gained 50.7% while the Communication Services sector has declined 32.0%. The 82.7 percentage point performance spread between the two sectors is one of the highest on record. Only July of 2009 and March of 2000 saw higher readings.

Since 1990, there have only been six times in which the best-worst 100-day performance spread crossed above 70 ppts for the first time in at least 50 trading days. This tends to occur amidst a volatile market environment. In the late 90’s, investors flooded into technology stocks while dumping ‘traditional’ stocks, which led to the Technology sector outperforming Energy by 70.2 percentage points in a 100-trading day span ending on 1/28/1999. When the dot-com bubble began to burst, the inverse occurred, and Materials outperformed Technology by 71.3% in the 100 trading days ending 3/9/2001. Coming out of the Global Financial Crisis, the Financials sector roared off of a depressed base, leading to outperformance against the Communication Services sector of 89.7 ppts. In late February of 2021, the Energy sector began to bounce back after the demand shock in the industry began to abate, while the Utilities sector remained relatively weak, leading to a 100-day performance spread of 71.1 ppts. This year, the sky-rocketing price of oil has propelled energy stocks higher while the Communication Services sector has been hampered by concerns that a peak demand environment was reached in 2020 and 2021 while valuation multiples have simultaneously contracted (largely due to the Fed’s hawkish pivot) pushing the 100-trading day performance spread out to 82.7 ppts.

As investors, we must remain forward-looking. So, what typically happens after dramatic performance spreads are reached between the best and worst sectors? It’s a small sample size, but based on the previous five occurrences, investors should consider rotating out of the best performing sector (which in this case would be Energy) after the spread hits 70 percentage points and move into the worst performing sector (Communication Services).

Three months after these occurrences, the worst-performing sector over the prior 100 trading days has booked a median gain of 12.1%, which is nine ppts better than that of the best performing sector.  Six months later, the median performance of the worst-performing sector in the initial 100 trading days outperformed the best performing sector by 15.5 ppts. Interestingly, twelve months later, the best performing sector in the initial 100 trading days regained the lead over the worst-performing sector outperforming on a median basis by a margin of 17.2% to 8.3%.  In terms of consistency, three and six months later, the previously worst performing sector outperformed the best performing sector three out of five times, but a year later, the previously best performing sector outperformed the worst-performing sector four out of five times.  Click here to become a Bespoke premium member today!

S&P 500 forward performance... Can energy keep it up?