If we look at the energy and tech sectors, we see a glaring discrepancy in returns … expect more to come

The last few years haven’t been easy on oil investors.

Let’s look at the Energy Select Sector SPDR Fund (XLE). It holds oil heavyweights including Exxon, Chevron, ConocoPhillips, Schlumberger, Occidental, and Valero to name a few.

Below you can see how XLE has performed compared to the S&P since 2015.

In short, while the S&P has climbed 50%, XLE hasn’t just trailed … it’s destroyed 15% of investors’ seed capital.

 

Over the past several years, we’ve been witnessing a changing of the guard in the stock market as yesterday’s energy leaders are being pushed aside by a new crop of market dominators.

For example, take Exxon.

In the year 2000, Exxon was the second largest company in the S&P 500 (behind General Electric), with a market cap of $302 billion.

Today, its market cap has dropped slightly, down to $290 billion. Meanwhile, the energy giant has fallen from second place down to eleventh.

What’s at the top now?

See for yourself.

 

 

All tech.

As just a quick comparison, below are the top four S&P companies by market cap back in 2000. You can see how there was greater diversity across sectors with representation from industrials, energy, biotech, and banking.

 

 

Clearly that’s not the case today, with all four companies at the top of the leaderboard being tech.

Back to Exxon …

The chart below shows how Exxon’s stock compares to “QQQ” which is an ETF that tracks the tech-heavy Nasdaq-100 index.

Since 2013, while QQQ would have made you more than 230%, Exxon would have shaved your investment by well over half.

 

 

From Zerohedge:

Bank of America even commented in a recent note that Apple, on its own, is worth more than the S&P 500 Energy Index, which includes names like Conoco, Exxon and Chevron.

***This fall, the energy sector weighting in the S&P 500 hit a low of about 4%

 

The sector hasn’t had a weighting this low in four decades.

Now, this isn’t the whole story …

You see, this diminished market cap isn’t because oil has shrunk — on an absolute basis, its size is roughly in-line with where it has been for years. But on a percentage basis, it’s been falling because tech has grown so large.

Below, you can see tech’s weighting compared to energy dating back to 1979. Around 2008, the two sectors were briefly about equal weight, but there’s been heavy divergence since.

 

 

This gap will only continue to expand.

Reason being, it’s not just that tech will continue to grow more than oil. The reality is that, in many ways, tech and oil have now entered a zero-sum game.

It’s not going to happen tomorrow, but make no mistake … the rise of electric and renewable energy has begun — tech will make sure of that. And as these new energies power a great percentage of tomorrow’s world, the loser will be oil.

***Look at how our market leaders are already gravitating toward new energy

In September, Amazon CEO, Jeff Bezos said his company would reach a goal of carbon neutrality by 2040. That’s a full decade ahead of the Paris Agreement goal.

He also said 10,000 electric-delivery vehicles will be on the roads by 2022. And as early as 2024, 80% of Amazon will be operating on renewable energy.

September also saw Google announce it was investing $2 billion into new renewable energy projects. That’s a record corporate purchase.

Or look at Duke Energy, the nation’s largest utility. It recently announced it will reach an interim target of 50% carbon emission reductions by 2030.

Now, expand this to the automotive industry. According to research firm McKinsey, carmakers around the world were planning to launch 66 new electric-vehicle models this year and another 101 models next year.

And as an exclamation point on this, Daimler, which is credited with inventing the modern gasoline engine, announced it will stop all research and development related to internal combustion — and direct that focus where?

Electrification.

***To be clear, oil isn’t going away anytime soon … but the point is tech stocks will be going much higher, much faster

Demand for oil is not about to vanish. If renewables were on the verge of replacing fossil fuels, we’d see that — but we’re not yet.

Case in point, look at Royal Dutch Shell. It plans to spend just $2 to $3 billion annually on renewable energy through 2025, out of a total budget of $30 billion per year. On average, oil and gas companies are spending only about 1% of their budget on renewables.

The reason is simple — they’re still making money from their fossil-fuel operations (for now, at least).

As such, energy investors shouldn’t feel the need to sell all oil-related stocks in their portfolios (though a good hard look at them would be appropriate).

But there’s a difference between a sector that’s going to continue to grow at, let’s call it, a single-digit rate, and the tech sector, that will be home to specific investments that will see thousands-of-percent gains in the coming years.

So, the broader point is not the demise of oil, but rather the dominance of tech — both in our lives and in our portfolios.

The question then becomes, how do you want to position yourself?

***Slightly switching gears, despite the efforts of some politicians, it’s unlikely that the problem of wealth inequality will be solved in any sort of meaningful way in the coming years

In fact, it’s likely only to get worse.

And as we’ve noted here in the Digest, one of the exacerbating influences on that wealth gap will be tech — specifically, those individuals who invest in tech for gains of thousands-of-percent increases … versus everyone else.

As an example of the wealth-potential of tech, let’s look at what past investors have made. But let’s not use an obvious company, like Apple or Amazon. Take data-storage company, EMC.

From its closing stock price on the last trading day of 1989 through the end of 2000, a $10,000 investment in EMC would have ended up being worth roughly $7 million.

As we wrap up, the markets are changing. Our world is changing. And behind much of this change is tech.

Over the next decade, much of the population in the U.S. will fall into one of three categories: the first, a bulk of the population who doesn’t invest and who works in jobs that will be negatively affected by technological advancements … the second, a group that will have more job insulation from tech advances. This group invests, but their money will be allocated to traditional sectors like energy that will likely generate positive returns but nothing earth-shattering … and last, a very small group of investors who will align the bulk of their investment capital with hypergrowth industries that are a part of tomorrow’s tech advancements — and find themselves on the other side of the wealth gap that’s coming.

We’ve entered an era of tech dominance. In one way or another, it’s going to impact your portfolio. As we look toward 2020, I hope you’ll give some thought to how you want to prepare.

Have a good evening,

Jeff Remsburg