For the past decade, investing in the US stock market has been pretty easy: buy the big names in tech, rinse, repeat. The famous five 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) have become so dominant that they account for 20% of S&P 500 at their peak.
But Putin’s war in Ukraine and the global energy crisis have dramatically changed that pattern.
This year, all 11 sectors in the S&P 500, excluding energy, are in the red. The same scenario played out last week, with energy leading and information technology the biggest losers. Here’s a breakdown of their weekly performance:
#1: Energy +4.30%, and Energy Select Sector SPDR ETF (NYSEARCA: XLE ) +4.25%.
#2: Materials -2.52% and Materials Select Sector SPDR ETF (NYSEARCA: XLB ) -1.26%.
#3: Utilities -2.64% and Utilities Select Sector SPDR ETF (NYSEARCA: XLU ) -2.56%.
#4: Consumer Products -3.53% and Consumer Staples Select Sector SPDR ETF (XLP) -3.20%.
#5: Healthcare -4.06% and Health Care Select Sector SPDR ETF (NYSEARCA: XLV ) -4.24%.
#6: Industrial -4.17%, and Industrial Select Sector SPDR ETF (NYSEARCA: XLI ) -3.36%.
#7: Real Estate -4.48%, and Real Estate Select Sector SPDR ETF (NYSEARCA: XLRE ) -3.80%.
#8: Finance -5.53%, and Financial Select Sector SPDR ETF (NYSEARCA: XLF ) -3.55%.
#9: Consumer Discretion -5.84%, and Consumer Discretionary Select Sector SPDR ETF (NYSEARCA: XLY ) -4.69%.
#10: Communication Services -6.56%, and Communications Services Select Sector SPDR Fund (NYSEARCA: XLC ) -4.39%.
#11: Information Technology -7.31%, and Technology Sector Select SPDR ETF (NYSEARCA: XLK ) -5.56%.
Nasdaq tumbled 5% on Friday, the worst performance on 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% thanks to Hawking’s comments from US Federal Reserve Chairman Jerome Powell at the Jackson Hole Symposium.
Global stocks took a $1.3 trillion hit in a single day, with large-cap technology hit particularly hard. Global equity funds recorded outflows totaling $5.1 billion in the week to August 24.
New FAANG
In an investor note, 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 investment age of war and high inflation and energy transformation – one that needs a new FAANG.
“It’s a game of hard assets and hard power. This is where we hide, it works well against the rest of the market. We went from pandemic to Putin in a few months; infections to inflation; Big Data to Big Oil; increase to zinc; mascara masks; E-commerce of electric vehicles; spear strikes; sanctions pads; Webex to Weddings; boosters to bombs; Non-Fungible Tokens (NFT) for Liquefied Natural Gas (LNG); North Atlantic Treaty Organization (NATO) Centers for Disease Control (CDC); work from home to work from office; the cloud to cobalt; and light assets to hard assets.’
Out is the old FAANG and in is the new growth areas of Wellwell, Aaerospace and defense, Aagriculture, nnuclear and renewable energy, and Zold and metals/minerals aka FAANG 2.0
“This cohort is emblematic of a world undergoing profound change. A sample of this change: energy security is now a top priority for most governments – just ask Poland and Bulgaria, cut off by Russian gas. Global defense spending exceeded $2 trillion for the first time in 2021 and is headed for higher levels. World food prices are at record highs. Nuclear is ready for a comeback; The demand for electric vehicles continues to grow. Gold is now the asset of choice for central banks thanks to geopolitics, while resource/food nationalism is spreading across the globe, adding even more pressure on metals/minerals and food prices,”
Related: Belgium’s energy minister: Europe faces tough winter without gas price cut
The divergent performance of the old FAANG and FAANG 2.0 is clearly evident:
Source: Yahoo
Despite a nearly 50% year-to-date gain, Jeff Buchbinder says the energy sector still has plenty of upside and laid out five reasons oil and gas stocks will continue to rise.
#1 Strong fundamentals: China’s zero-spread policy for COVID-19 has seen some easing with reopenings after repeated on-and-off lockdowns supporting demand. At the same time a a potential deal allowing Iranian crude to flow freely again could be offset by production cuts from Saudi Arabia.
#2. Earnings Momentum: The second-quarter earnings season was all about energy, the big outperformer, with companies upping the ante with dividend hikes and plenty 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. Estimates are too pessimistic: The sector trades on a PE ratio below 9 based on 12-month forward earnings versus 17.5 for the broader S&P 500 – Buchbinder says that doesn’t make sense given the sector’s cash flow yield, which tops 10% , more than twice the level for the S&P 500.
#5. Technical factors: Among the few that could bode well for energy stocks, momentum is strong, with 90% of S&P 500 energy stocks trading at 20-day highs
By Alex Kimani for Oilprice.com
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