Energy stocks got hammered Friday — and, to a lesser extent today — making this a painful stretch for SMI's Sector Rotation investors. Since being recommended early this year, SR's investment in the energy sector has yielded solid results until recently (SR was still up +10.9% from February 1, when the strategy pivoted into energy stocks, through Friday's close).

As to whether SR will stick with energy or move on, Mark will have those details, based on the latest trend numbers, in his monthly SR post this Friday (9/30).

For today, we'll seize the opportunity presented by energy's current slide to remind you that the energy sector's short-term performance obscures the longer-term picture. The factors affecting energy suggest a bullish outlook for the longer term — although we make no assertion about timing. If a recession is at hand, that's certainly not bullish for energy. Recessions always suppress energy demand, which, in turn, pushes down prices. 

But in the longer run, energy will continue to face pressure on the supply side, partly because of government and investment-community hostility toward fossil fuels.

In the investment world, that hostility takes the form of "ESG" investing, which stands for Environmental, Social, and [Corporate] Governance. As Mark noted earlier this year, "ESG has become a major force in institutional investing. Environmental criteria have caused many large investors (pension plans, insurance funds, even ETF providers) to not only avoid new investments in conventional energy companies but to divest any such investments already in their portfolios."

An ideological agenda?

As you might guess, such policies have their critics. Among those critics are 19 state attorneys general who think investing firms may be violating their fiduciary responsibility to investors.

Last month, those AGs (all Republicans) collectively sent an eight-page letter (PDF) to BlackRock, the world's largest asset manager, suggesting that because of Blackrock's position on energy investments, the company appears to be using "the hard-earned money of our states' citizens to circumvent the best possible return on investment." 

The letter quotes from a Blackrock policy statement that says the company has committed to "implement a stewardship and engagement strategy...that is consistent with our ambition for all assets under management to achieve net zero emissions by 2050 or sooner."

The letter further states: "BlackRock appears to be acting for a social purpose that may have a financial benefit [only] if certain improbable assumptions occur. If BlackRock were focused solely on financial returns, its conduct would likely be different."

Other pushback against corporate ESG policies comes from Florida Gov. Ron DeSantis, a possible Republican presidential contender in 2024. The governor and the state's Board of Administration have directed Florida's fund managers to "invest state funds in a manner that prioritizes the highest return on investment for Florida's taxpayers and retirees without considering the ideological agenda of the environmental, social, and corporate governance (ESG) movement."

"We are prioritizing the financial security of the people of Florida over whimsical notions of a utopian tomorrow," DeSantis said at an August news conference (video).

Firmly entrenched

Perhaps these pushback efforts will prompt big investment firms to re-think their commitment to ESG investing, but that seems unlikely. ESG is firmly entrenched in the corporate world. Matt Orsagh of the CFA Institute, which trains financial advisers, offers this metaphor: "With this issue of ESG integration, that horse has left the barn and it's in the next county and the barn has burned down and a new one has been built. That's ages ago; it's kind of settled."

Perhaps. Few things are ever "settled." But it seems that uprooting ESG, if it happens, could take many years. Which is, ironically, one of the reasons SMI remains bullish about commodities and energy stocks over the next several years. ESG likely will continue to be a headwind to bringing the additional supply of needed resources to market.

Granted, the supply/demand impact of that headwind may be difficult to discern in the short term, particularly during a recession. But over a longer period, mismatches between intentionally suppressed energy supplies and steadily growing global demand could drive energy prices higher — perhaps much higher.