One is the Loneliest Number

Energy is the only sector in the S&P 500 that’s positive over 3-month, 6-month, and year-to-date periods. If we take that window back one year, the only other sectors with positive returns are Utilities, Consumer Staples, and Health Care — the classically “defensive” portions of the index. And even still, Energy has outperformed all three of those sectors by more than 43 percentage points. Yowza.

In this bear market, Energy truly is the last man standing. Perhaps rightfully so given the supply/demand relationship that drives prices and the chain of events that has affected both sides of that equation. But it begs the question: will Energy meet its “mean reversion” fate too?

Another One Bites the Dust

It’s already on its way. The Energy sector has fallen almost 20% since its most recent high on June 8th, with WTI Crude Oil prices down 16% and Natural Gas down 22% over the same period. That puts Energy very near bear market territory and Natural Gas squarely in one. And that all happened over the last 14 calendar days!

The tricky part about this is that Energy stocks don’t necessarily follow Energy prices. And even with the recent fall, oil prices are still ~60% higher than they were pre-pandemic, which has given a boost to Energy companies who make a profit off of rising prices. In fact, Energy may be one of the only sectors still set to raise earnings guidance for the rest of the year given the persistently high demand and elevated price of oil.

Hence the popular call to buy or hold energy stocks. Despite the S&P 500 market cap now being back to where it was one year ago, the market cap of the Energy sector has more than doubled.

Juice Ain’t Worth the Squeeze

But this isn’t a popularity contest and I wasn’t prom queen. Trends and momentum work until they don’t, and in the case of energy prices, inflection points can look like blunt force trauma on a chart. Given the current global slowdown, increasing fear of recession with demand destruction, and the possibility of a surprise de-escalation in Russia/Ukraine, I don’t see this as a good time to rely on high oil prices as a buy signal. I see it as a good time to take profits.

The devil’s advocate argument is one I already made — that energy stock prices don’t necessarily follow energy commodity prices — but they’re related enough for me to feel like the chance of disappointment over the next 12 months is higher than the chance of positive surprises. The one caveat I would make is that if you are an investor looking for dividend income, energy stocks may be attractive. If price appreciation is your objective, it’s more important to lessen the blow of sharp drawdowns than it is to participate in the extra few percentage points of upside.

Want more insights from Liz? The Important Part: Investing With Liz Young, a new podcast from SoFi, takes listeners through today’s top-of-mind themes in investing and breaks them down into digestible and actionable pieces.

Listen & Subscribe

Please understand that this information provided is general in nature and shouldn’t be construed as a recommendation or solicitation of any products offered by SoFi’s affiliates and subsidiaries. In addition, this information is by no means meant to provide investment or financial advice, nor is it intended to serve as the basis for any investment decision or recommendation to buy or sell any asset. Keep in mind that investing involves risk, and past performance of an asset never guarantees future results or returns. It’s important for investors to consider their specific financial needs, goals, and risk profile before making an investment decision.
The information and analysis provided through hyperlinks to third party websites, while believed to be accurate, cannot be guaranteed by SoFi. These links are provided for informational purposes and should not be viewed as an endorsement. No brands or products mentioned are affiliated with SoFi, nor do they endorse or sponsor this content.
Communication of SoFi Wealth LLC an SEC Registered Investment Adviser
SoFi isn’t recommending and is not affiliated with the brands or companies displayed. Brands displayed neither endorse or sponsor this article. Third party trademarks and service marks referenced are property of their respective owners.
Communication of SoFi Wealth LLC an SEC Registered Investment Adviser. Information about SoFi Wealth’s advisory operations, services, and fees is set forth in SoFi Wealth’s current Form ADV Part 2 (Brochure), a copy of which is available upon request and at www.adviserinfo.sec.gov. Liz Young is a Registered Representative of SoFi Securities and Investment Advisor Representative of SoFi Wealth. Her ADV 2B is available at www.sofi.com/legal/adv.
SOSS22062303

The post Liz Looks at: Energy appeared first on SoFi.