A Bull Market in Clean Energy

A bear market^* is a 20% correction from a previous high and can last several months, if not years, while a bull market is defined as a 20% rally in stock prices after two 20% declines^*. Thus, since the S&P 500 Index fell 20% from its January high, down just over 24% at one point, we are in a bear market. Many stock indexes around the world are in a bear market, but not all of them. Can there be bull markets inside of a broad bear? The answer is - Yes!

As August comes to a close, Clean Energy is actually in a bull market.

At First Trust we’re acutely aware of how thematic investments march to their own beat, potentially offering an investment profile more akin to its theme, not following the broader market. Clean energy thus far in 2022 is a shining example of this. From the end of June to the end of August 2022, the Nasdaq Clean Edge Green Energy Index was up 22%. In fact, since May 11^th it was actually up ~39%, while the S&P 500 is barely positive (+1.07%).

Source: Factset. 11/5/2022 – 31/8/2022. Closing price index to 100. Past performance is not a guarantee of future results and current performance may be higher or lower than performance quoted. Investment returns and principal value will fluctuate and shares when sold or redeemed, may be worth more or less than their original cost. Indexes do not charge management fees or brokerage expenses, and no such fees or expenses were deducted from the performance shown. Indexes are unmanaged and an investor cannot invest directly in an index.

The separation from the pack becomes clearer as we dial back to a YTD view and add a few other indices, notably the NASDAQ 100, the S&P 500 Value and Growth indices. The Clean Energy Index has two clear 20% declines, one at start the year and the second starting in April, bottoming on May 11^th. Since mid-summer there has been a broad rally across markets as U.S interest rates have paused their march higher, with the 10-year UST peaking just shy of 3.5%. However, clean energy has been electrified, outperforming even the S&P 500 Value Index in 2022.

Source: Factset. 31/12/2022 – 31/8/2022. Closing price index to 100. Past performance is not a guarantee of future results and current performance may be higher or lower than performance quoted. Investment returns and principal value will fluctuate and shares when sold or redeemed, may be worth more or less than their original cost. Indexes do not charge management fees or brokerage expenses, and no such fees or expenses were deducted from the performance shown. Indexes are unmanaged and an investor cannot invest directly in an index.

Thematic investing can help investors isolate their risks as well as their return drivers. Clean Energy in 2022 seems to be a great example.  

One potential reason for the separation may be the sticky increase in prices of more traditional fossil fuels, discussed in our Lollapolooza Effect article. This may be leading to the stellar sales growth reported by the companies in the Green Energy Index, boasting a weighted average year over year sales growth of ~74%.

Further, the last few months have seen bill after bill in support of the clean energy market. To start, there is the $200 Billion annual expenditure coming from last year’s $1T infrastructure Bill to the most recent Bill passed in August of 2022, dubbed a historic climate bill, detailed in our most recent article. In May, the RepowerEU plan was passed allocating a further $300Billion towards clean energy for the EU.

When will the broader Bear Market end? When will inflation cool? While the macro uncertainty remains, one thing is clear, Clean Energy remains a focal point for government spending and the market sure seems to like it. As we enter September, the NASDAQ Clean Edge Green Energy index is strongly in a Bull market in a world full of bears.

 

Sources

^*Investopedia

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