O&G stocks in the 1970s - what really happened

The gist: Most market participants think of the O&G equities in the 1970s as a market that only went up and to the right. This was NOT the case. O&G stocks were still impacted by recessions and for a majority of the time O&G equities stocks acted more as a store of real capital preservation due to their premium dividend yields. However, like all investment manias, the period ended in parabolic euphoria. Throughout I discuss parallels and differences to today.

---

Please be aware that in the course of this post, I will use the terms Oil & Gas (O&G) stocks and the Crude Chronicles Energy Index (CCEI) interchangeably.

Most think of the 1970s cycle as this endless up-and-to-the-right move in O&G stocks. Similar to some Mag7 tech stocks of today.

That was NOT the case.

From 1970 to the summer of 1978, energy stocks appreciated by ~50%, a 5.6% per annum CAGR. Not exactly a mania.

However, as shown in the orange line (CCEI divided by S&P 500) they did beat the market.

Every pullback in relative strength (blue circles) was met with a “higher-low”. This is important because every pullback must attract a new buyer and they did so.

During this period, energy acted more as a store of value against inflation which was eating away at the purchasing power of stocks.

Inflation will compress any stock’s multiple - O&G, tech, growth, value, etc.

It is just the degree to which a sector is affected.

We can see this in the chart below.

The 1973 oil shock sent inflation soaring and crushed P/E multiples.

The CCEI P/E fell along with the S&P 500 as shown below.