It may seem like ancient market history already, but last Friday the S&P 500 energy sector surged by more than 10%. By Monday the unprecedented drop in oil futures had sent a barrel of crude into negative territory, which had people thinking they would be paid to fill up at the gas pump and left investors in one popular oil ETF in for their own personal energy shock.
All eyes remain on the wild action in crude, but it's worth looking at how stocks have traded historically after sudden surges in energy portion of the S&P 500, even as its weight in the stock market falls significantly. The energy sector represented as much as 25% of the index in 1980 and still 15% a decade ago. Now energy is under 3% of the U.S. stock market.
The action in oil has continued to be tumultuous this week, down and back up 20% during single trading sessions. Oil was rising for a third day on Friday, and so was the Dow Jones Industrial Average, after the rout that saw futures turn negative for the first time ever. Some big energy names, like Exxon Mobil and Chevron, had strong days on Thursday even as the market ended flat. That's contributed to gains in the exchange-traded fund that tracks the stocks in the S&P energy sector, the Energy Select Sector SPDR (XLE).
Will XLE, and the rest of the stock market, stay up?
The major averages have rallied more than 25% since late March, but the S&P and Dow were both on pace for their first negative week in three at the open on Friday. Recent market history of energy stocks and the broader stock market after the XLE experiences a one-day jump of 5%-plus suggest that if investors are willing to look past the 2008–2009 financial crisis period, the near-term chart for the S&P and Dow could remain positive.
Across all 13 trading events since 2000 when there were big jumps in the XLE, the average return one month later for both the Dow Jones Industrial Average and S&P 500 has been positive, according to data from Kensho, a hedge fund trading analytics platform, at 0.74% and 0.67%, respectively.
But the financial crisis period specifically paints a very different picture. Many investors are focused on the most recent crisis to gain insights on what the recent market volatility could mean next for stocks, even though the response from the federal government in the form of stimulus has been faster and more coordinated now than it was back then.
The Kensho data shows that across the six times during the financial crisis that XLE was up 5% or more in a day, the average return for the S&P 500 one month out was negative 4.15%, and negative 4.36% for the Dow. XLE, meanwhile, was down more than 7% on average across these 2008–2009 trades. The energy sector also posted a negative average return, of -1.43%, across all 13 of these trading events back to 2000.
Investors who trade $1 million or more in a self-directed brokerage account are not rushing back into energy stocks, according to a recent survey conducted by E-Trade Financial. It found interest in energy from the first quarter 2020 to the second quarter had declined significantly, with 26% of millionaire investors saying the energy sector offered the most potential for gains in Q2, down from 40% in Q1. Investors are favoring defensive sectors of the S&P 500, like consumer staples and health care.
But some investors see opportunity in the beaten-down energy names, including XLE. Investment research firm New Constructs' CEO David Trainer recently told CNBC Exxon and Chevron, which are down 40% and 30%, respectively, this year, are among the names that look attractive since they will survive and gain market share.
John Davi, CIO and founder of Astoria Portfolio Advisors, told CNBC that while he isn't bullish on energy, ETFs like XLE are the best way for investors to gain broad exposure to the sector. "It's big, it's liquid, it's $8 billion ... plus you can potentially get a substantially higher dividend yield compared to buying the S&P 500 index," Davi said
Energy market research firm Rystad says the situation in crude oil is not going to improve, with storage capacity already stretched to the breaking point.
"A wave of shut-ins is inevitable for the oil market to come closer to a balance," it wrote to clients on Friday. "Unless more production shuts down, the extracted oil will literally have nowhere else to be stored. ... This is not something the industry has ever seen or ever been prepared for. ... A major shock is brewing for producers and unless there is a firmer response from their side to voluntarily slash output, we will soon be discussing the greatest energy crisis in history."