What Happened in the Surprising Equity Sectors of 2016

1. Energy

a. Energy was the best performing sector in 2016, up 27% compared to a positive 11% for the S&P 500

b. Through January 2016, energy stocks had fallen almost 50% from mid-2014 levels as West Texas Intermediate crude oil (WTI) prices fell from over $110/barrel to under $30/bbl and natural gas declined from $5.00/million British Thermal Units to $1.60/mmBTUs.

c. In 2016, Energy outperformed for the following reasons:

  1. WTI has recovered over 70% since January to $53/bbl
  2. Natural gas has more than doubled since January to $3.70/mmBTUs

3. Both OPEC and non-OPEC producers have agreed to decrease production for the first time in years

4. Global growth has increased demand for energy products

d. We expect these positive trends to stay in place, at least through the first half of 2017:

  1. Many energy producers are still recovering from their balance sheet problems of recent years since oil and gas prices are still significantly below the levels where increased investments were made 2 to 3 years ago
  2. Much of US energy transportation and storage facilities are full not allowing US producers to produce additional energy to take advantage of higher prices

3. The supply/demand equation will become in balanced at the beginning of the year as global supply stabilizes and global demand increases

2. Health Care

a. Health Care was the worst performing sector in 2016, down 4%

b. Health Care outperformed from 2011 to 2015 due to the implementation of the Affordable Care Act (ACA) providing 20 million new paying patience for the health care system, strong pricing power for drugs and medical supplies, and increased merger activity using the strong cash flow generated from the above.