Though unlikely to be permanent, the current level of immunity the energy sector is displaying while the broader market tumbles is undoubtedly impressive.
The S&P 500 Energy Index is up almost 19% in the current quarter and 46.7% year-to-date while the S&P 500 is down 11% in the second quarter and 18% year-to-date. Even with an impressive showing that dates back to last year, the energy sector is drawing praise on Wall Street and that could prove beneficial for exchange traded funds such as the Invesco S&P 500 Equal Weight Energy ETF (RYE).
In a note to clients out Thursday, Bank of America strategists opine that if stagflation – an economic condition marked by high inflation and slack growth – comes to pass, energy stocks can still win.
The stagflation-induced downside for the S&P 500 “would follow the Federal Reserve’s ongoing efforts to halt inflation by raising interest rates, which in turn would eat into corporate earnings potential,” reports Jeff Cox for CNBC. “In that case, energy has a potential 89% upside implied by relative forward price to earnings, as well as 33% implied upside using price-to-book, and a 47% upside gauged by price to operating cash flow.”
For its part, the equal-weight RYE is a potent play on energy equities and one that offers significantly less concentration risk than its cap-weighted competitors. On a quarterly basis, the equal-weight sector fund is slightly outpacing the cap-weighted S&P 500 Energy Index. On a year-to-date basis, RYE’s advantage is a notable 125 basis points.
Obviously, those are impressive data points, but making RYE all the more relevant is the point that at the moment and as noted by Bank of America, energy and materials are the sectors that screen most positively on a tactical basis.
“Commodity price inflation helped both sectors, but China risk, a strong [U.S. dollar] and recession are headwinds for Materials, just moved to underweight, given China exposure and a shift from goods to services. We remain overweight Energy, which benefits from low US supply, accelerating services demand, and war,” says Savita Subramanian, Bank of America’s equity and quant strategist.
And as its 63% gain over the past 12 months confirms, RYE is a credible inflation-fighting ETF for investors to consider as consumer prices remain high.
“Consumer prices rose 8.3% year-over-year in April, while producer prices accelerated by 11%. Commodity-related sectors tend to do well in times of rising inflation as cheaper U.S. currency makes dollar-denominated assets more attractive,” according to CNBC.
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The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.