Bear Market Sector Performance (Energy)

The chart below shows the performance of each sector in the bear market, since the peak in February, and since the bottom in March. The most notable performance is energy which fell 56% from peak to trough and rose 63.1% since the bottom. That still puts its returns since the top at -28.3% which is the 2nd worst performance. 

Energy started the year in bad shape. A supply glut from OPEC refusing to cut production and the demand decline because of COVID-19 were the final straws for this beleaguered sector. Low vol S&P 500 index literally has a 0% energy weighting. This has been a terrible sector to invest in for a few years.

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In the past 5 years, the shale play hasn’t worked out. That’s because many of these firms had funny accounting that made them look like they had higher breakevens than they did. Firms came out with the ridiculous term called EBITDAX which is earnings excluding interest, taxes, depreciation, amortization, and exploration expenses. 

Even the most stringent investors don’t like to look at EBITDA or adjusted EBITDA because there can be funny business with the numbers. They prefer GAAP earnings and free cash flow. However, even accepting investors don’t like the concept of excluding exploration costs. That’s like if a company excluded customer acquisition costs. Shale players lost gobs of money and took on a lot of debt. Plus, they increased the supply of oil which lowered its price. There was a collapse in late 2014.

From 2016 to 2019, the energy market wasn’t as bad. 2020 was like a death knell for the space as Whiting Petroleum went bankrupt and others are closing in on that. Highly respected companies are close to disaster. Even Shell cut its dividend for the first time since the 1940s. 

Many have noticed on Twitter there are accounts solely dedicated to attacking energy executives which made sure they got paid even as their companies collapsed. There was even a post-mortem on frac sand companies. Frac sand is mixed with water and chemicals in non-conventional drilling. This mixture is used to fracture the shale to get the oil out. These companies were terrible investments and mislead investors. 

With all that being said, this disaster of a sector got as bad as it could get. Energy has always had a boom and bust cycle and this was one of the biggest busts ever. That made it a buying opportunity.

Financials Have Done The Worst

Some of the financial services stocks like Moody’s and S&P Global have done well. That’s because investors want financial sector exposure without buying the banks. Banks are low growth businesses that now have to deal with an increase in defaults. Many investors are arguing that if the banking system is in disarray, the economy can’t function and the stock market must fall. Even though the banks have dramatically shrunk as a percentage of the market, they give off a strong signaling effect.

Fed will always have the bank’s back, but do we really want the Fed to be in a situation where it needs to help Wells Fargo WFC? That would create a worse financial crisis than the last one because the banks are bigger now. Top few banks have a much larger market share because of the mergers in the last crisis. 

If Wells Fargo failed, it would take down the entire global economy. I don’t think that’s close to happening. But the economy can’t succeed without a strong banking system. A current weak one is a bad signal. 

As the chart above shows, since the February top, the financials are down 29% which is the worst out of any sector. That’s because they have only recovered 24.6% which is the 2nd worst performance. They fell 43% in the bear market decline which was the 2nd worst as well.

Utilities & Staples

This bear market was unusual because the utilities didn’t save you. That’s even though the 10-year treasury yield hit a new record low. Even gold fell initially even though it likes low yields. Utilities fell because they were in a bubble prior to this bear market. If it wasn’t for the decline in yields, we could have seen the sector underperform by a larger margin. It has been a bad run for this sector because it is only up 25.3% since the low.

Even technology declined less than utilities in the bear market. That’s not supposed to happen. However, it makes sense because technology stocks tend to have low debt and they do well with more people shopping online and working from home. 

Let’s not get too excited about these stocks and think they can’t fall just because they outperformed in this bear run. They can fall for no fundamental reason because they are expensive. How do you think the tech bubble burst occurred? This bubble isn’t as big, but the cloud stocks can easily fall 20% in a few weeks. CLOU ETF is now up 19.01% year to date and 50.43% since the bottom. This ETF is up 4.15% since the February top which is better than any sector.  

Consumer staples sector got the job done by protecting you from the volatility as it only fell 24.3% in the bear market. It’s up 18.2% since the bottom which is the worst performance as you’d expect. Clorox CLX and Wal-Mart WMT are too expensive, with Clorox being in an outright bubble. Clorox is up 33.83% year to date. This stock’s 30 PE multiple guarantees you weak long term performance. 

Wal-Mart is up 5.47% year to date. The firm shut down Jet.com which it spent $3 billion on in 2016. What a disaster! The firm lost $2 billion on its online e-commerce business in 2019. E-commerce was up 74% this past quarter. There is simply no point in having Jet.com if Wal-Mart.com exists. That acquisition was a big waste of money.