By Mark DeCambre, MarketWatch
Energy sector's bearish posture has been offset by tech,
financial sectors. Can it last over the coming 6 months?
The vagaries of crude-oil and appeared to weigh heavily on
stocks in the past week, but as the landscape of rest of 2017 looks
set to unfurl into the second half, it's hard to make a case that a
downturn in oil will be the dagger that takes down a bull market
headed into its ninth year.
That is because oil's gravitational pull on the markets is far
from what it used to be during crude's halcyon days of three-digit
price tags. Back in 2008, oil's moves were closely aligned with
equity benchmarks like the S&P 500 index , the Dow Jones
Industrial Average, and the Nasdaq Composite Index, demonstrating a
positive correlation. That is, tending to move in the same
direction at the same time. But since its recent peak around 2014,
oil's relationship with oil has diminished if not broken down.
The chart attached shows the relative moves of crude-oil futures
(in purple), the energy sector closely pegged to it, including
oil-and-gas companies, measured by the exchange traded Energy
Select Sector SPDR ETF(XLE) (in blue), and the S&P 500 (in
green), which appears to have diverged from the energy cohort.
The recent plunge for oil into bear-market territory
(http://www.marketwatch.com/story/oil-hovers-at-seven-month-low-as-investors-weigh-up-supply-issues-2017-06-20),
defined as a drop from a recent peak of at least 20%, comes as a
consortium led by the Organization of the Petroleum Exporting
Countries have failed to stabilize prices, despite a recently
reupped pact to limit production until March 2018.
Check out:This is the real reason we're 'drowning in oil,' says
Ed Yardeni
(http://www.marketwatch.com/story/this-is-the-real-reason-were-drowning-in-oil-says-ed-yardeni-2017-06-21)
Last week, crude futures booked their fifth straight weekly
decline settling at $43.01 a barrel, marking their longest weekly
string of losses since an eight week stretch ended the week of Aug.
21
(http://www.marketwatch.com/story/oil-prices-edge-up-as-big-producers-stick-to-cuts-2017-06-23-6103497),
2015. U.S. shale-oil producers, cited as the biggest headwind to
tamping down what is described as a global glut of oil, logged a
23rd straight weekly increase in rigs drilling for oil, Baker
Hughes Inc.
(http://www.marketwatch.com/story/oil-prices-cut-gains-as-data-show-us-oil-rig-count-up-23-consecutive-weeks-2017-06-23)(BHI)reported
on Friday
(http://www.marketwatch.com/story/oil-prices-cut-gains-as-data-show-us-oil-rig-count-up-23-consecutive-weeks-2017-06-23).
Although some have wondered briefly if this swing into the red
for oil could signal the volatility-inducing event potent enough
the knock these buoyant markets sharply lower, the past few years
of action have proved otherwise.
Part of the reason for that may be that energy has become less
significant. The sector represents 6% of the overall S&P 500.
That is the seventh smallest weighting among the S&P 500's 11
sectors, compared with the technology, health-care and financial
sectors, which combined represent a little more than half of the
S&P 500's performance.
In other words, a downturn in energy names like Transocean Ltd.
(RIG) and Chesapeake Energy Corp. (CHK) is more than offset by
gains in shares of tech, the banking sector and health care. So
far, that has been the case, with tech(XLK) and health care (XLV)
posting the best performances so far this year, up 20% and 17%,
respectively. Meanwhile, financials (XLF) have put in a respectable
2.6% return after rallying 33% over the past 12 months.
Of course, there is an economic element to oil, which is often
used as a gauge of global health. But crude doesn't appear to be
accurately tracking that, by some estimates.
Neil Atkinson, head of oil analysis at the International Energy
Agency, recently said the current production curb by more than 20
major oil producers has succeeded in denting the global supply
(http://www.marketwatch.com/story/further-opec-cuts-will-deepen-oil-supply-deficit-in-second-half-of-2017-iea-2017-05-10)
glut that the second half of 2017 is likely to see a deficit.
It certainly, may not feel that way to many oil bulls. But that
may be a function of the diminished status of the commodity, with
even OPEC, once the most revered cartels in business, struggling to
manage pricing.
Dennis Gartman, founder and editor of an eponymous newsletter,
disagrees with Atkinson's outlook for demand, but says oil is going
to way of the Dodo in the several decades: "It will be supplanted
by something else," he told CNBC recently
(http://www.cnbc.com/2017/06/24/gartman-the-oil-bear-market-has-turned-crude-into-a-worthless-commodity.html),
suggesting new technology and renewables might be inherent the
energy crown.
In the end, it might just not matter significantly.
If anything, lower crude has proved a to be more of tax cut for
individuals and businesses, by measure of the equity markets which
have managed to hover near records. All three main benchmarks
finished Friday's trade less than 1% shy of their all-time
highs.
To be sure, the wheels could come off the record-setting train
at any point.
Tom Lee, portfolio strategist at Fundstrat Global Advisors told
MarketWatch that he's expecting a much softer second-half for 2017,
given signs of muted inflation. He also pointed to a yield curve, a
graph that maps Treasury yields across all maturities, particularly
between the two-year and 10-year notes , that is at its narrowest
since September (https://fred.stlouisfed.org/series/T10Y2Y). That
tightening spread is sometimes interpreted as a sign of a sluggish
economy and comes as the Federal Reserve is on a
monetary-normalization kick.
Read: Will falling oil prices keep the Fed from hiking rates?
(http://www.marketwatch.com/story/will-falling-oil-prices-help-bond-investors-beat-the-fed-2017-06-23)
"As we approach mid-year, we are revising S&P 500 [2017 and
2018 full year earning-per-share forecast] to reflect weaker
inflation, flattening yield curve, rising labor costs and 'pushed
out' timing of White House agenda," he wrote in a Friday research
report. That agenda includes Trump's promises of tax cuts,
deregulation and tax reform.
Lee told MarketWatch that investors continue to be complacent
but may be soon be jolted awake.
"I think so far the [negative data] has fallen on deaf ears," he
said.
Looking ahead, there is an outside chance that the U.S. Senate
could vote on some form of Trump's health-care bill, which could
influence markets that has been driving health-care shares
higher.
"I think that health-care has been able to rise amid this
uncertain and that's a good sign for the market," said Mark Newton,
technical analyst and founder at Newton Advisors.
Newton said he's optimistic about the market but sees the
"potential for turbulence in the third quarter in July through
August." He said one concern harks back to oil and is tied to
high-yield bonds, which are heavily linked to energy pains because
many companies with weak credit take out loans and sell bonds to
pay for expansion and rigs, for example.
"So far, technology has been one of the few sectors to carry the
load but can they hold up?" Newton asked.
(END) Dow Jones Newswires
June 24, 2017 19:06 ET (23:06 GMT)
Copyright (c) 2017 Dow Jones & Company, Inc.
Baker Hughes (NYSE:BHI)
Historical Stock Chart
From Mar 2024 to Apr 2024
Baker Hughes (NYSE:BHI)
Historical Stock Chart
From Apr 2023 to Apr 2024