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.

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

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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.

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

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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.