Energy Sector Humming On Low Volatility

January 31, 2013

Structural changes in the industry may tame volatile energy markets.

 

In 2012, all 10 GICS sectors finished in positive territory, but energy lagged.

So far in 2013, it has been the hottest sector. Is it time to jump back in?

2012 proved to be a very challenging year for energy firms. Although the sector, as measured by the Energy Select Sector SPDR Fund  (NYSEArca: XLE), eked out a 2 percent  gain for the calendar year, it was the worst-performing sector in the S&P 500, lagging the best performer, the Financial Select Sector SPDR Fund (NYSEArca: XLF), by 23 percentage points.

There were a number of contributing factors that caused XLE to lag, many of which have been covered in much better detail by the team over at HardAssetsInvestor.com.

The point is, 2012 was a trying year for energy investors, despite the advent of new easing policies from the Federal Reserve and promise of improving economic activity.

Fast-forward to January 2013: Although we’re just a month into the year, energy has reversed its fortunes and has provided the best year-to-date sector returns.

Before we try and determine if this latest rally has legs, it’s important to note that wild year-to-year performance swings in the energy sector are hardly a surprise.

Over the past 10 years, energy has been either the best- or worst-performing sector seven different times—more than any other sector by a wide margin. It should also come as no surprise when you consider that energy was the second-most-volatile sector (24 percent average annual volatility) behind financials over the past 10 years.

That’s perhaps more impressive when you account for the fact that energy did not have a “black swan” event like financials, where large chunks of the industry disappeared.

 

 

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