My first stock market industry coverage responsibility came in late 1978 at Value Line. A more experienced colleague was poached by an institutional investor (nirvana for a VLer at that time). Even though I had only a few months’ training, I became the firm’s oil analyst.
This was just as OPEC was repudiating Western colonial control of the world oil supply–the overthrow of the Shah of Iran in 1979 being a main catalyst. Oil prices tripled. Oil stocks shook off their typical bond-like torpor and began a raging two-year+ bull market.
The advance didn’t happen all at once, however:
–Small oil and gas exploration companies in the US, for whom rising prices had the most direct positive impact, rose first.
–Then came medium-sized, mostly domestic US-oriented, integrated firms (meaning they refined and marketed oil products in addition to exploring). Most of these were subsequently acquired.
–Finally, the big Seven Sister-class international integrateds moved up, too.
This whole process, as I recall it, took most of a year. The exact timing isn’t so important. The pattern is, though, because it’s one that recurs. In particular, I think, it’s a useful tool to assess the massive tech rally we saw in 2017.
Wall Street then paused while it worked out whether there was more to go for. It said there was. And the whole three-tier process began again.
At the end of Round Two, the stocks were all fully valued by any conventional lights. But international unrest continued …and the three-tier process happened once more. At that point the stocks were wildly overvalued.
Easy to say in hindsight, you may be thinking. But there was a company back then called American Quasar that clearly signaled the excessive enthusiasm. AQ was the exploration firm that discovered the Rocky Mountain Overthrust belt of trapped natural gas and ran tax shelters (always a danger sign) to finance their exploration. In my view, Round One of the sector advance fully valued AQ’s reserves. Round Two very fully valued its future exploration prospects, as well (this almost never happens). Round Three placed a huge multiple on large prospective acreage it had just leased and had not yet drilled (which turned out to be the only parts of the Overthrust not to have any hydrocarbons).
In early 1981, the spot price of oil on commodity markets began to dip, initiating a three-year bear market in which many oil stocks lost 2/3 of their peak valuations.
The way I’m thinking about it, IT stocks finished Round One in late 2017. To my mind, the sharp rise in Intel shares last September-November is like the big international integrateds finally participating back in 1979. It signals that the valuation gap between firms exposed to the hot areas of IT and the large left-behinds had grown too wide. Investors thought it made more sense to bet that INTC could lift its game than to buy more shares of an already high-flier. It’s a red flag.
Now we’re in a wait-and-see period. My guess is that there will ultimately be a Round Two. But, as I’ve written elsewhere, IT is already about 25% of the total S&P 500 market cap. That’s a daunting size. My guess is that other sectors will have to rally in a way that reduces the IT weighting to, say, 20% before tech before more than the strongest tech names take off again. But I think IT will ultimately rally.