History Says Energy Beat Every Sector in the Last Bear Market. Here's the Catch if Another One Is Coming.

Investors often think past performance predicts future results, but that isn't always true. The last bear market occurred in 2022, and the energy sector stood out then. However, the story may not repeat itself if another bear market arrives in 2026 or 2027. This is because the factors that led to the energy sector's strong performance in 2022 are different now.

During that year, Vanguard Energy ETF (VDE) rose 55%, while the Vanguard S&P 500 ETF (VOO) fell by up to 24%. But VDE experienced a significant drop of more than 25% during the year, so buying and selling at the wrong times could lead to worse outcomes than with an S&P 500 index fund. The issue today is that oil prices are at high levels due to the ongoing conflict in the Middle East.

Before 2022, energy had been in a multi-year decline, recovering from a sharp drop caused by the coronavirus pandemic. So, when the 2022 bear market started, the energy sector was still healing from earlier losses. This isn't the case now, with oil prices already high. The energy sector's 25% temporary drop in 2022, despite its overall strong performance, serves as a warning for future bear markets.

If oil prices fall from their current levels, the sector could face further declines. While energy is crucial for the global economy, it's not a reliable safe haven in a bear market. It's better to have some exposure to the sector but not count on it as a protective measure.