EC Can Energy Stocks Continue To Lead US Sector Returns In 2021?

Shares in the energy patch continue to post the strongest year-to-date performance for US equity sectors, based on a set of exchange-traded funds through yesterday’s close (Mar. 23). The dramatic bounce from last year’s low has left the rest of the sector field in the dust in 2021. But some of the laggards are showing relative strength in recent weeks, suggesting that a leadership rotation may be brewing.

At the moment, however, the rear-view mirror for the year so far favors energy companies by a wide margin. Energy Select Sector (XLE) is up 27.5% in 2021 through Tuesday’s close. That’s nearly double the gain for the next-best sector rally (financials via XLF) or the market overall, based on SPDR S&P 500 (SPY), which is up a relatively modest 4.5% year to date.

A key driver of the rebound in energy shares: expectations that US economic growth is picking up. But after pricing in a forecast for accelerating economic activity, the question is whether the macro data will deliver upbeat numbers?

“Shares are being bid up because there are expectations for greater demand,” noted Michael Arone, chief investment strategist for State Street Global Advisors, earlier this month. “We need to see the follow-through.”

Recent economic data hasn’t been cooperative. Two broad measures of the US macro trend have been surprisingly weak. Start with the Philly Fed’s ADS business cycle index, which is currently reflecting a contraction in US output, based on data through Mar. 18. This index can be volatile in the short term and so the weakness may be noise, but the latest results offer a reason for managing expectations down.

The monthly data for the Chicago Fed National Activity Index (CFNAI), by contrast, is more reliable. Unfortunately, this week’s update for February shows a decline in US output last month – the first monthly negative print since April 2020, when the pandemic-induced recession was raging.

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Disclosures: None.

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