Are Energy Stocks Good Before a Recession

The Cruel Paradox for Investors

For 50 years now, an inverted yield curve (10-year yields below two-year yields) has foreseen a looming recession with perfect accuracy (a 1,000% batting average).

The cruel paradox is that one might think investing in economically sensitive industries such as oil and natural gas isn’t a good place to be when a recession appears imminent because of an inverted yield curve.

Historically, and you might be surprised, this thinking has been almost entirely incorrect.

We’ve had 8 recessions since the 1960s. Out of the recessions that were all predicted by an inverted yield curve, only two were suboptimal times to be invested in the energy sector at the time of the yield inversion.

In fact, the inverted yield curve in 1968, 1973, 1978, and 2005 that correctly predicted the upcoming recessions were recessions that manifested largely because of energy spikes due to tight oil supplies.

That means that when the yield curve inverted and predicted slowing economic data, the place to be for investors during these years would have been in energy stocks. It’s as if the inverted yield curve knew all along that energy spikes were coming!

The inverted yield curve in 1989 and its ensuing recession also had an immaterial impact on energy companies since they increased in value over the recession even though there were no energy spikes.

Thus, 6 out of the last 8 inverted yield curves have basically signaled that they were great times for investors to get into energy even though recessions loomed.

The two times the inverted yield curves were not conducive for energy investors were because of the worldwide COVID-19 lockdowns in March of 2020 and the 1980 inverted yield curve that transpired after a decade-long capital spending plan to shore up U.S. energy independence (the opposite of today).

In fact, the only time energy investors didn’t make out spectacularly well with a 1- to -3-year time horizon after an inverted yield curve was in 1980, when the fundamentals simply didn’t favor energy, unlike today.

As of this September, the yield curve has inverted for the 9th time over the last 50+ years.

This is probably a signal that another recession is coming, and it will all too likely be catalyzed by another energy super-spike because of energy shortages that are as acute as they’ve ever been.

Best regards,
Nicholas Green