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

The CFNAI data may be noisy, too, suffering a temporary slide as the pandemic blowback continues to take a toll. The counterpoint is that as the vaccine rollout continues, the prospects are improving for firmer economic activity in the months ahead and so looking backward is unusually misleading.

Consider the trend in new US Covid-19 fatalities through yesterday (Mar. 23), which looks encouraging relative to recent history. Notably, the 10-day average was below the 1,000-per-day mark for a second day on Tuesday – the lowest two-day run in more than four months.

Despite the weakness in business-cycle indexes lately, nowcasts for next month’s first-quarter GDP report remain upbeat, albeit moderately less so compared with previous weeks. The Atlanta Fed’s GDPNow model, for instance, is currently projecting a strong 5.7% increase in output (real annualized rate) for Q1, up from Q4’s 4.1% rise.

Meantime, the sector laggards are stirring, hinting at the possibility of a shift in leadership. Consider, for instance, that the two equity sectors with the weakest year-to-date results – utilities (XLU) and consumer staples (XLP) — are posting the strongest sector returns so far in March, returns that are well ahead of energy (XLE) and the broad US market (SPY).

Is this a sign that energy’s leadership is fading and more defensive sectors are picking up the slack? Unclear for now, but if economic data in the weeks ahead is softer than expected the appetite for utilities and consumer staples could benefit further at the expense of energy stocks.

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Disclosures: None.

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