For the past decade or so, investing in the US stock market has been pretty simple: buy the big tech names, rinse, repeat. The famous five days of Meta Inc. (NASDAQ: FB) (formerly known as Facebook), Amazon Inc. (NASDAQ: AMZN), Apple Inc. (NASDAQ: AAPL) Netflix Inc.(NASDAQ: NFLX ) and Alphabet Inc. (NASDAQ: GOOG)) (formerly known as Google) became so dominant that they comprised 20% of S&P 500 at their peak.
But Putin’s war in Ukraine and the global energy crisis have dramatically changed that playbook.
This year, all 11 S&P 500 sectors outside of energy are in the red. Last week, the same scenario played itself out with energy leading and IT the top loser. Here’s a breakdown of their weekly performance:
#1: Energy +4.30%, and the Energy Select Sector SPDR ETF (NYSEARCA: XLE ) +4.25%.
#2: Materials -2.52%, and the Materials Select Sector SPDR ETF (NYSEARCA: XLB ) -1.26%.
#3: Utilities -2.64%, and the Utilities Select Sector SPDR ETF (NYSEARCA: XLU ) -2.56%.
#4: Consumer Staples -3.53%, and the Consumer Staples Select Sector SPDR ETF (XLP) -3.20%.
#5: Healthcare -4.06%, and the Health Care Select Sector SPDR ETF (NYSEARCA: XLV ) -4.24%.
#6: Industrial -4.17%, and Industry Select Sector SPDR ETF (NYSEARCA: XLI ) -3.36%.
#7: Real Estate -4.48%, and the Real Estate Select Sector SPDR ETF (NYSEARCA: XLRE ) -3.80%.
#8: Finance -5.53%, and the Financial Sector Select SPDR ETF (NYSEARCA: XLF ) -3.55%.
#9: Consumer Discretionary -5.84%, and the Consumer Discretionary SPDR ETF (NYSEARCA: XLY ) -4.69%.
#10: Communication Services -6.56%, and the Contact Services Select Sector SPDR Fund (NYSEARCA: XLC ) -4.39%.
#11: IT -7.31%, and the Technology Select Sector SPDR ETF (NYSEARCA: XLK ) -5.56%.
The Nasdaq plunged 5% on Friday, the worst performance of the major markets and its worst daily performance since last June. The stock market is now down 22.2% this year, firmly in bear territory. The S&P 500 on Friday posted weekly losses of more than 4% thanks to hawkish comments from US Federal Reserve Chairman Jerome Powell at the Jackson Hole conference.
Global stocks gained $1.3 trillion in one day, with large-cap technology hit particularly hard. Global equity mutual funds recorded outflows totaling $5.1 billion in the week to 24 August.
In a note to investors, Merrill Lynch and Bank of America Private Bank investment strategists Lauren J. Sanfilippo and Joseph P. Quinlan said we are in the midst of a new era of investment warfare and high inflation and energy transformation – a time when a new FAANG is needed.
“It’s a game of hard assets and hard power. That’s where we were hiding, it’s doing well relative to the rest of the market. In a few months, we went from the pandemic to Putin. infections to inflation; Big Data to Big Oil; zoom in zinc. mascara masks; E-commerce in electric vehicles. javelins; smears for sanctions; Webex on weddings; boosters for bombs; Non-tradable tokens (NFT) in liquefied natural gas (LNG). Centers for Disease Control (CDC) in the North Atlantic Treaty Organization (NATO). work-from-home to work-from-office. the cloud in cobalt; and lite assets to hard assets.”
Outside is the old FAANG and inside are its new growth areas eatwelsh, ONEspace and defense, ONEAgriculture, Nraw and renewable energy sources, and Gold and metals/minerals aka FAANG 2.0
“This cohort is emblematic of a world undergoing profound change. One example of this change: energy security is now the top priority of most governments–just ask Poland and Bulgaria, cut off from Russian gas. Global defense spending topped $2 trillion for the first time in 2021 and is moving higher. Global food prices are at record highs. Nuclear is ready for a comeback. The demand for electric vehicles continues to grow. Gold is now the preferred asset of central banks thanks to geopolitics, while resource/food nationalism is proliferating around the world, adding even more upward pressure to metal/mineral and food prices»,
Related: Belgian Energy Minister: Europe faces tough winter without gas price cuts
The divergent performance of the old FAANG and FAANG 2.0 is clearly evident:
Despite a nearly 50% YTD gain, Jeff Buchbinder says the energy sector still has plenty of upside and has listed five reasons why oil and gas stocks continue to move higher.
#1 Strong Basics: China’s zero-Covid-19 policy has seen some easing with reopenings after multiple on-and-off lockdowns, helping demand. At the same time, a potential deal to allow Iranian crude to flow freely again could be offset by production cuts from Saudi Arabia.
#2. Profit potential: Q2 earnings season was all about energy – big outperformance, with companies pushing the envelope with dividend hikes and lots of share buybacks.
#3. Warren Buffett: “We’re not saying buy OXY, but rather that if Mr. Buffett likes the energy sector so much, we should pay attention,” Buchbinder says.
#4. Valuations are very pessimistic: The sector trades on a PE ratio of less than 9 based on forward 12-month earnings versus 17.5 for the broader S&P 500 – Buchbinder says this doesn’t make sense given that the sector’s cash flow yields are over 10%, more than double the level for the S&P 500.
#5. Technical factors: Among many that could bode well for energy stocks, the range was strong, with 90% of stocks in the S&P 500 energy sector trading at 20-day highs
By Alex Kimani for Oilprice.com
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