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S&P 1200 Energy Sector's Relative Performance at Lowest Level in 20 Years

The energy sector of the S&P Global 1200 has been a market underperformer essentially since this bull market got started back in 2009. On an annual basis, the energy sector has never risen more than the broader benchmark. Its only claim to fame is that it fell less than the overall market in 2008 and 2011. There comes a point, however, in which a group becomes so unloved that it begs to be bought and put away for an eventual recovery. Today, global energy stocks could be making that same plea. The energy group’s relative performance is now at its lowest level in 20 years. Some may be a bit reluctant about buying into energy, as its relative performance exhibits the glide path of a crow bar. Yet by combining Energy with Consumer Staples and Technology, you just may end up getting something for nothing – in other words, a free lunch

Rolling 12-Month Relative Strength of the S&P Global 1200 Energy Sector v. S&P Global 1200

How? By diversifying among sectors based on low correlation, as well as when they performed best in a typical economic cycle since WWII. From 1995 to the present, a hypothetical portfolio of 1/3rd Consumer Staples (the icon of defensiveness), 1/3rd Information Technology (the poster child for cyclicality), and 1/3rd Energy (a late-cycle inflation hedge) that was rebalanced annually, posted an 8.7% CAGR, vs a 6.0% return for the S&P Global 1200, and did so with a lower annual volatility. Plus, this portfolio outperformed the S&P Global 1200 in two out of every three years since 1995 (67%). Of course, past performance is no guarantee of future results. However, should future sector rotation within an economic cycle mirror the pattern within the S&P 500 over the past 70 years, this strategy has a good chance of continuing to deliver solid returns.

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