July 11, 2005
Oil, gasoline and virtually every other fuel price posts strong gains in the 21st century. But if you thought that would have an impact on the energy sector’s relative market-cap ranking in the S&P 500, you’ve been hornswoggled by Mr. Market.
Bull market or not, energy remains in seventh place in the perennial ten-horse race within the S&P 500. As of July 8, energy’s market cap was just shy of $1 trillion, according to Standard & Poor’s data. Although that valuation is up by 41% from a year previous, the seventh-place spot remains unchanged. Not even oil’s price rise of 48% in the year through July 8 could budge Mr. Market’s judgment on that slice of sector relativity.
Even more revealing is the knowledge that the oil sector’s seventh-status labeling stretches back more than a year. Four years ago, energy was stuck in its usual spot of seventh among, a point in time when crude was priced considerably lower in the mid-$20s.
All of which raises the question of what, if anything, might convince Mr. Market to reassess and thereby elevate the relative position of the energy sector in the S&P 500? $70 oil? $80? Or is the answer nothing short of $100 a barrel?
Whatever the reason behind energy’s failure to advance in the relativity rankings it’s not for lack of price performance in the underlying stocks. The Energy Select Spider (Amex: XLE), which represents the cap-weighted slice of energy stocks in the S&P 500, has climbed a sizzling 41% on a price basis for the year through June 30. The S&P 500 Spider (Amex: SPY) looks numb by comparison, inching higher by just a bit over 4%.
Affording a higher relative market cap may be the dream of some energy bulls, but for the moment there are a number of obstacles to overcome, starting with the market’s long-running love affair with financial stocks. Until, and if, that love affair falters, it’s hard to see energy moving up the relative totem poll in any dramatic fashion any time soon. Indeed, the financial sector’s market cap has been firmly entrenched as numero uno for some time. Arguably, it reflects a remnant of the days of wine and easy money. But no matter what you call it, cheap doesn’t apply. At $2.2 trillion, the financial stocks in the S&P 500 dwarf even the number-two sector, information technology, which resides at $1.7 trillion as of July 8.
For all the financial sector’s support from investors, its performance has been unmistakably mediocre of late. The Financial Sector Spider (Amex: XLF) trailed the S&P 500 for the year through the close of this year’s second quarter, posting a mere 3.1% price increase. That’s a notable reversal from the financial sector’s formerly high-flying returns. In the four years through June 30, 2004, for instance, XLF’s price ascended by 20% vs. a 21% loss for the S&P 500 Spider.
Old habits nonetheless die hard on Wall Street. The easy money policies that the Federal Reserve has so generously dispensed throughout the economy in the recent past are beginning to fade, as witnessed by the ongoing rise of the Fed funds rate. Financial stocks are still the darlings of investors. And who, after all, could argue? Certainly not the bond market, which has seen fit to chase bonds and thereby keep yields falling, or at least something other than rising. That’s been no small boost the fortunes of financial companies, many of which turn a profit with some form of borrowing short and lending long.
Yet a quick glance at the latest action in the fixed-income world suggests, for the umpteenth time, that the party may be about to end. True, many have been fooled by such “warning” signs in the past. But one day, maybe, the end really will be nigh. Meanwhile, the yield on the benchmark 10-year bond yield rose to 4.12%, the highest since mid-May. Is this the pause that finally sobers up the sentiment in the 20-year-old-plus bull market in debt?
Equity investors in energy and financial stocks are but two constituencies with a dog in this race and more than passing interest in the answer.
Posted by jp at July 11, 2005 2:13 PM
I like some of the big financials when their yield gets around 4%...
Posted by: muckdog at July 12, 2005 12:42 AM