Over the past decade or so, investing in the U.S. stock market has been pretty straightforward: buy the big names in tech, rinse, repeat. The famous quintuplet 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 made up 20% of the S&P 500 at their peak.
But Putin’s war in Ukraine and the global energy crisis have dramatically altered that playbook.
This year, all 11 sectors in the S&P 500 barring Energy are in the red. Last week, the same scenario played itself out with energy leading and Information Technology 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: Health Care -4.06%, and the Health Care Select Sector SPDR ETF (NYSEARCA: XLV) -4.24%.
#6: Industrials -4.17%, and the Industrial 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: Financials -5.53%, and the Financial Select Sector SPDR ETF (NYSEARCA: XLF) -3.55%.
#9: Consumer Discretionary -5.84%, and the Consumer Discretionary Select Sector SPDR ETF (NYSEARCA: XLY) -4.69%.
#10: Communication Services -6.56%, and the Communication Services Select Sector SPDR Fund (NYSEARCA: XLC) -4.39%.
#11: Information Technology -7.31%, and the Technology Select Sector SPDR ETF (NYSEARCA: XLK) -5.56%.
Nasdaq plummeted 5% on Friday, the worst performer of the major exchanges, and its worst one-day performance since last June. The exchange is now down 22.2% this year, firmly in bear territory. The S&P 500 on Friday posted weekly losses of more than 4% thnks to hawking comments by the U.S. Federal Reserve Chair Jerome Powell at the Jackson Hole symposium.
Global stocks took a $1.3 trillion hit in a single day, with big-cap tech getting hit particularly hard. Global equity funds recorded outflows totaling $5.1 billion in the week through Aug. 24.
New FAANG
In an investor note, Merrill Lynch and Bank of America Private Bank investment strategists Lauren J. Sanfilippo and Joseph P. Quinlan have said that we are in the throes of a new investing epoch of war and high inflation and energy transformation–one that needs a new FAANG.
“It’s a play on hard assets and hard power. That’s where we’ve been hiding out, it’s been working out well relatively speaking to the rest of the market. In a matter of months, we have gone from a pandemic to Putin; infections to inflation; Big Data to Big Oil; zoom to zinc; masks to mascara; E-commerce to electric vehicles; jabs to javelins; swabs to sanctions; Webex to weddings; boosters to bombs; Non-fungible tokens (NFTs) to liquefied natural gas (LNG); Centers for Disease Control (CDC) to North Atlantic Treaty Organization (NATO); work-from-home to work-from-office; the cloud to cobalt; and lite assets to hard assets.”
Out is the old FAANG and in are the new growth areas of Fuels, Aerospace & defense, Agriculture, Nuclear and renewables, and Gold and metals/minerals aka FAANG 2.0
“This cohort is emblematic of a world undergoing profound change. A sampling 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 headed higher. World food prices are at record highs. Nuclear is poised for a comeback; Electric Vehicle demand continues to soar. Gold is now the preferred asset of central banks thanks to geopolitics, while resource/food nationalism is proliferating around the world, adding even more upside pressure to metal/mineral and food prices,”
Related: Belgian Energy Minister: Europe Faces Tough Winter Without Gas Price Cuts
The diverging performance of the the old FAANG and FAANG 2.0 is clearly evident:
Source: Yahoo
Despite its nearly 50% YTD gain, Jeff Buchbinder says the energy sector still has plenty of upside and has laid out five reasons for oil and gas stocks to continue their run higher.
#1 Strong fundamentals: China’s zero-COVID policy has seen some easing with reopenings after multiple on-and-off lockdowns, helping demand. At the same time, a potential deal allowing Iranian crude to flow freely again could be offset by production cuts from Saudi Arabia.
#2. Earnings momentum: Q2 earnings season was all about energy–the big outperformer, with companies upping the ante 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 that much, we should pay attention,” Buchbinder says.
#4. Valuations are too pessimistic: The sector has been trading at a P-E ratio below 9 based on 12-month forward earnings vs. 17.5 for the broader S&P 500 – Buchbinder says this makes no sense, given sector cash flow yields that are topping 10%, more than double the level for the S&P 500.
#5. Technical factors: Among several that could bode well for energy stocks, breadth has been 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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