The S&P 500 Hits a New All-Time High, and Is It Time to Buy Energy?
All-time highs are a great time to buy stocks, while energy remains out of favor.
This article is not meant to serve as investment advice, and is for entertainment purposes only. At the time of writing this article, I own shares of CVX.
Finally, a New All-Time High!
For the first time since January 4, 2022 the S&P 500 index closed at an all-time high this past Friday. This is the first time the index has closed at an all-time high since before the creation of The Simple Stock Report! The past two years saw a bear market, crazed fear of a recession (which hasn’t come, yet), a new frontier of AI begin to blossom, “miracle” weight loss drugs, and many stories that we have all forgotten about by now.
I would try to make an argument that this is the most hated all-time high ever, but I haven’t seen many all-time highs since I started investing! That being said, tuning into any business news channel will give you an idea of the sentiment: recession is coming, Fed needs to cut rates, the market is overvalued, and so on. While I could argue either side of each of those beliefs, I instead stumbled upon cold hard numbers that might just tell us what to expect out of the stock market for the next 12 months. Let’s take a look.
All-Time Highs are Bullish
The more I learn about investing the more I realize you have to throw out all rational thought in order to be a successful investor. Who the heck would want to buy something, in this case the S&P 500, when the price of it has quite literally never been higher? Well, this chart below might offer a clue to why you should consider it:
This chart shows 14 times when the S&P 500 hit a new all-time high after not hitting one for at least 12 months prior. Every single time the index was higher 12 months later. The average 12 month return in this situation is 14.84%, with a median of 13.62%, both of which higher than the long run average return of roughly 8%. Also worth pointing out the max drawdowns in each of these situations averaged -2.91%, with a max of -7.74%, which means we often just move steadily higher after a new all-time high.
I cannot begin to describe how mind-boggling it is to me to see stats like this. How is it possible that a great time to buy stocks is when they have never been higher in price? Of course the best time to buy would have been October 2022 when the bear market bottomed, but the second best time is right now.
Don’t take all-time highs for granted. While this new high took two years, there have been several times where it took much, much longer. Here’s to many more all-time highs!
Buying Chevron (and other out of favor energy stocks)
At the complete opposite spectrum of new all-time highs is the energy sector. It seems like every single day Chevron and Exxon Mobil make new 52-week lows (I am sure other energy stocks are doing the same, but I frankly don’t care about the others). That said, I have two charts that each tell a completely different story about energy stocks:
As you can see in the chart above, which shows the S&P 500 compared to the energy sector since Jan 1, 2023, energy was left behind in the 2023/2024 stock market rally to new highs. Before you feel bad for energy stocks, this next chart shows the S&P 500 versus the energy sector since Jan 1, 2022:
So one takeaway here is that anyone can use any time frame they want to prove their own beliefs. Another takeaway is that since the S&P 500’s last all-time high energy has been an incredible performer. While 2023 was disappointing, it was coming off a year of record earnings and cash flows for the energy sector, and expectations were far too high to be met.
While earnings were nearly cut in half for the energy sector in 2023, I believe this is more a reflection of oil and natural gas prices falling along with record numbers in the prior year, not a reflection of poor performance of these companies. They are more efficient than ever, and deal making has ramped up in the energy sector (Chevron with Hess, Exxon with Pioneer, to name a couple), which shows companies believe better times are to come.
Chevron isn’t a stock I have spent too much time discussing on The Simple Stock Report, but it does make up nearly 7% of my stock portfolio. It is (obviously) my energy sector stock of choice, and I believe the stock will be just as important in a clean energy future as it is currently. That said, the market has tossed this stock and this sector to the side and forgotten about it, which is why I believe it is the perfect time to buy.
Expectations are incredibly low, the stocks are out of favor, the fundamentals are strong, and oil isn’t going anywhere any time soon. If I may quote Ben Graham in The Intelligent Investor:
If we assume that it is the habit of the market to overvalue common stocks which have been showing excellent growth or are glamorous for some other reason, it is logical to expect that it will undervalue — relatively, at least — companies that are out of favor because of unsatisfactory developments of a temporary nature. This may be set down as a fundamental law of the stock market, and it suggests an investment approach that should prove both conservative and promising.
This is what I believe is happening with energy stocks. All unloved sectors will eventually be loved again, and if you’re willing to wait it out you could be rewarded.
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