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The Next 20 Years: Will Energy And Financials Switch Places?

http://bcaresearch.com/public/highlights.asp?pre=PRE-20040525.GIF

Market leadership changes are slow to develop, but can last for a long time when they do occur. For example, the energy sector’s share of the total market capitalization was over 25% in the early-1980s, the last time oil was at such high levels. Conversely, at that time when interest rates were sky-high, the financial sector accounted for a meager 5% or so weighting. The two sectors have completely reversed places in the past 25 years, owing to the relentless drop in interest rates and, until recently, depressed crude oil prices. Consequently, we anticipate a major reversal in relative fortunes in the years ahead. The emerging world’s rising demand for energy and the increased global push to stockpile supplies in the face of heightened geopolitical risks suggest that energy company profits will continue to grow as a share of total GDP for a long time to come. Meanwhile, an end to the disinflation era could see Treasury yields begin a long, slow rise upward, especially if high oil prices in the next decade contribute to an increase in inflation expectations.