The market hasn’t seen this kind of an oil boom since back in the late 1970’s – early 1980’s. Some of you were probably throwing up milk and crapping in your Huggies back then, but regardless, oil hit new highs of over $35/bbl. Adjusted for inflation, that’s over $70/bbl in 2006 dollars.
This was mostly due to supply contraints that were a result of events in Iraq and Iran in 1979 and 1980. Odd, no?
The energy sector was almost 30% of the S&P 500. Inflation was running rampant. Mortgage interest was 16%. In short, to quote Louis Armstrong, “what a wonderful world”.
Oil was all people talked about. All that investors wanted to buy.
Subsequent to that period, energy went bust. Oil prices dropped from over $35/bbl in 1981 to under $15.
And, as recently as 2004, energy was only about 7% of the S&P 500. Financials were 23%.
Fast forward to the first half of 2008. As a result of all the plundering going on in the bank stocks, financials now represent under 15% of the S&P 500. Energy is now about 16% of the S&P. So, from the perspective of sector weightings within the S&P, energy has more than doubled its weighting in just four years, but is nowhere near the weighting the market saw in 1980.
What does the future hold? Well, imagine this….if trends continue, could we possibly see a flip flop of 2004, where energy now becomes 23% of the S&P and financials 7%? Will financials continue to get waylaid by the bears? How about if energy gets to 1980 levels,…30% of the S&P? Is it possible? Time will tell. We’re best advised to continue to track oil prices.
Putting it all in perspective, It appears that there is still room for the upside in energy stocks.
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