When Donald Trump was elected president, markets expected that his policies promoting domestic oil production and slowing the shift toward renewable energy would soon show up in prices of stocks.
Not so fast.
While the Environmental Protection Agency under Trump isn't making any friends among backers of climate science — and critics have called for Tesla Motors founder Elon Musk to drop off Trump's CEO advisory panel — the type of renewable-energy stocks linked to Musk are thriving during Trump's first 100 days.
All but one of the clean-energy exchange-traded funds followed by ETF Database are up this year; seven of the 10 are beating the S&P 500. Meanwhile, the Standard & Poor's 500 Energy Index (XLE), which tracks mostly large-cap fossil fuel companies is down near-10 percent this year, through April 24, with integrated oil majors like Exxon Mobil and Chevron down slightly more.
The issues aren't especially complicated, analysts say: Policy changes are running up against fundamental market forces that are more important for stocks than marginal changes designed to boost energy supplies, which might also tend to push energy prices lower.
"The commodity price environment is substantially more important to energy companies than policy is," said Michael Ferguson, a director in the energy information practice at Standard & Poor's Global Ratings.
If you're invested in the energy sector, there are some factors that influence stock and commodity prices that are more important to watch than political news coverage.
The post-election rally in oil shares accompanied a $11-a-barrel climb in crude-oil prices from October levels. But this year the S&P 500 Energy sub-index's drop has come as the entire S&P index has tacked on another 6 percent. The reason: the WTI crude-oil price decline from $56 a barrel to $47, which proceeded throughout most of March. Lower crude prices are simply more important to oil stocks than a presidential permit for the long-delayed Keystone XL pipeline and Trump's promises to open more federal lands for oil drilling.
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The wild card here is whether the civil war in Syria and ongoing crisis in Libya might push crude back up. WTI crude rallied toward the end of March and in the wake of the U.S. attack on a Syrian airbase in response to the use of chemical weapons against civilians on April 4. But it had been on a six-day losing streak before settling above $49 on Tuesday.
Some energy market experts are moderately bullish about the immediate future, calling for $60-a-barrel oil by summer. But one oil trader who called crude's major crash thinks the current environment will prevent any sustainable gains in oil prices.
The sell-off in crude is likely to work its way into oil-company profits later this year, according to Goldman Sachs analysts led by U.S. stock strategist David Kostin, who expects cuts in optimism and forecasts. First-quarter profits in the industry are likely to reverse losses early last year and beat consensus forecasts, says Goldman, who pointed to analyst estimates for the full year that have already fallen more in energy — almost 5 percent — than in any other sector.
"The [majors] haven't been able to make exploration more profitable,'' said David Nadig, CEO of ETF.com, which tracks the ETF industry.
Exxon and Chevron report earnings this Friday.
Where have oil stocks been gaining? Among the refiners. The VanEck Vectors Oil Refiners ETF is up 6.5 percent this year. But even among ETFs that have significant exposure to refiners, such as PowerShares Dynamic Energy Exploration & Production Portfolio (PXE) and iShares U.S. Oil and Gas Exploration (IEO), the broader energy decline has kept these funds in the red this year.
Coal has had a nice bounceback. The VanEck Vectors Coal ETF (KOL) that tracks the president's second-favorite industry behind real estate is up 12 percent this year. But don't credit Trump: Nine of its top 10 holdings are based outside the United States, and Consol, the one U.S. name, announced in January it's looking to sell off its U.S. coal business and concentrate on natural gas. The ETF's top holding, Teck Resources, mines coal for steelmaking rather than utilities and is based in Canada. It also mines copper, gold and other commodities, and its shares have fluctuated.
KOL declined annually by anywhere from 20 percent to 55 percent in the five years between 2011 and 2015, losing in total more than half its value. In the past one-year period through April 24, the ETF is up 61 percent. But its five-year annualized gain is –13 percent, according to Morningstar data, through April 24.
Here's why coal gains are not necessarily built to last: An industry rule of thumb holds that coal becomes a competitive source of fuel to make electricity when natural gas costs at least $6 per million British Thermal Units of heat it generates. Right now the benchmark Henry Hub spot price for gas is bouncing around $3 per million BTUs. Coal-related bonds, the sector with perhaps the most to gain from better prospects for coal companies to repay their debts, are being analyzed within this economic prism rather than on a turnaround the president has promised.
"Economics, not regulation, is the prime driver of near-term coal sector distress," Moody's Investor Service analysts, led by Swami Venkataraman, wrote in a report. "For the next 3–5 years, the primary driver of coal plant shutdowns is expected to be the poor economics of coal vis-a-vis natural gas and renewables. The trend of low gas prices and declining renewable costs are independent of expectations created by the [Clean Power Plan] CPP and will continue to affect coal-fired generation even in its absence."
This year the pure-play approach has won: The PowerShares WilderHill Clean Energy Portfolio (PBW) has done the best among ETFs classified as alternative energy, up 11 percent.
Its top holdings are makers of equipment for wind, solar and geothermal energy, plus Tesla Motors, the highest-profile green stock of them all, which has risen more than 40 percent this year.
"Most of these companies are global in scope," Nadig said. "It's not necessarily the case that if the U.S. changes policy, it's awful for these companies.''
The PowerShares WilderHill Progressive Energy Portfolio (PUW) is a good example of how a name can mean different things to different people. This ETF's top holdings include companies that make pesticides, herbicides and insecticides (FMC) and one of the biggest fracking companies in the United States (Chesapeake Energy). That's also one of the reasons it has not done as well as the pure-play renewables PBW this year.
Jason Bloom, global market strategist at PowerShares, said via email that PUW "is really more designed for investors looking at returns in a sector that should benefit from the transition to natural gas and away from coal. In this sense, progressive represents newer technology and processes that are helping bring the energy sector into a more efficient future."
The volatility in energy trades is a factor that also plays out in the renewable-energy sector: Solar, wind and nuclear stocks don't tend to go straight up for long, even if they've been going up this year. Four of the clean energy ETFs, including two solar ETFs, had huge losses last year before regaining ground in 2017. Even this year's big winner, PBW, has a three-year annualized return of –13 percent (5-year annualized is –1 percent). And that was under climate-friendly President Obama.
The Global X Uranium ETF (URA), up near-15 percent this year, has a five-year track record even worse than coal's, with an annualized loss of 20 percent, according to Morningstar. The Guggenheim Solar Energy ETF (TAN) has a three-year annualized return of –23 percent.
PowerShares' strategist Bloom said, "Renewable-energy trends are moving in the right direction, especially if you look at the opportunities in China where many of their larger cities have hit toxicity thresholds. Economic growth continues to accelerate clean-energy adoption around the world, and with rapidly expanding economies of scale, we may see performance smooth out going forward."
Bottom line: Elections may ultimately sort out domestic priorities, but economics — and recent stock-sector performance — matter a lot more to investing than political promises.
— By Tim Mullaney, special to CNBC.com