You know you’re getting old when you can’t remember the last time Energy stocks were a market leader. The chart below shows the relative strength of the S&P 500 Energy sector versus the S&P 500 going back to August 1989. When the line is rising, it indicates periods where Energy is outperforming the S&P 500, while periods of Energy sector underperformance are indicated by falling lines. The period from September 1990 through January 1999 was one where the sector was out of favor, and it was towards the end of it when Exxon merged with Mobil and then Chevron merged with Texaco. At the time those mergers were announced, the sector was right in the midst of putting in a multi-year bottom that sparked a nine-year period of major outperformance by the sector.
Like all good parties, though, the music eventually stopped for the Energy sector in July 2008 just as the Financial Crisis was unfolding. From that peak up until now, Energy has been a major underperformer versus the S&P 500 and given up nearly all of its prior outperformance. Even more noteworthy, though, is the fact that the current period of underperformance has now lasted longer (9 years, 1 month) than the 8 years and 4-month stretch that spanned the majority of the 1990s. We have noted in the past that overcapacity looms as one of the major impediments to a sustainable rally in the Energy sector, and one way to remedy that is through consolidation. That’s exactly what happened in the late 1990s, but this time around we have yet to see any really big headline-grabbing mergers in the space.
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