A Strategy Shift In Energy Investing

This morning’s U.S. employment report was, I think, the most remarkable data release I have ever seen, at least relative to expectations. Non-farm payrolls, the number of jobs in the economy overall, were expected to drop by a massive number, over 8 million by most forecasts, but instead, they rose by around 2.5 million. A lot of very smart people got it very wrong and the U.S. economy gave yet another remarkable demonstration of its resilience.

I have no doubt some people will try to make political capital out of that, but the fact that it can be spun both ways hints at how pointless and disingenuous that is.

You can say that it just shows what a great leader Donald Trump is, even though, the U.S. has over three times the number of Covid-19 deaths per capita of, say, Germany and even though the bounce back really has nothing to do with him.

Or, if you prefer the other flavor, you can hail the heroine Nancy Pelosi, who has bravely fought Republican opposition to ensure massive government stimulus. From that perspective, she is the great leader, even though with $23 trillion of debt and counting, there will, at some point be a price to pay for it all, and an economy dependent on the public purse is by nature, fragile.

If you can avoid partisanship, though, there are some pretty clear lessons to learn this morning, but not from the numbers themselves. The clearest sign for investors came from the initial market reaction, and that is good news for the energy sector.

As you might expect, Dow futures took off immediately, adding 500 points or so to the 200-point gain indicated by futures before the release. After an initial pop, though, Nasdaq futures fell back, briefly showing a loss on the day before recovering to turn positive later. Even so, as I write, the Nasdaq’s gains are around half those of the Dow.

What does that say?

Well, to me it says that there is a rotation going on. The big tech names that have led the recovery are falling out of favor and the previously risky sectors and industries are now being seen as value, not a money pit. Energy is one of those sectors.

The effect was obvious in a few stocks, mainly those that had been seen before as the riskiest, the biggest lost causes. Something like Transocean (RIG), that jumped to 45% above yesterday’s close, even after a couple of strong days, taking the gains to over 70% in 3 days. Or two that I recommended here last week, FCEL and BLDP, that are now up 37% and 18% respectively from last Friday’s open.

Obviously, there are other factors that will influence energy stocks over the next few weeks, most notably the outcome of the OPEC+ meeting that is expected to start tomorrow. There has been some grumbling going in. That is normal for anything involving OPEC but history suggests that when push comes to shove they will bury the hatchet, ignore the lying and cheating that so often happens during these agreements, and announce an extension and/or increase to the output cuts when the meeting ends.

If you want to wait to confirm that I understand given the outsized reaction that would result from any other outcome, but this morning changed the overall upside.

Even though good news from OPEC+ is already priced into oil, such news could still easily prompt a big surge in energy stocks next week. A stock market desperately seeking value in underperforming sectors will react strongly to any external good news in one of them, however expected that news may be.

So, the next few weeks look like being a long=overdue good time for energy investors. Everything in the sector will benefit should that be the case, but now is a good time to add a bit more risk to your energy portfolio and to buy some of the hardest hit. There is still a chance of real, long-term problems in some, so these are not buys for long-term holding, but they could prove extremely profitable in the short-term.