While most stocks are struggling, energy and financial stocks are thriving. Here are two that look particularly attractive.
It’s been a rare down week in the stock market. But there’s nothing to be alarmed about. The S&P 500 is only down a little so far. And the uptrend that has existed for almost a year is still intact.
Even this market doesn’t go straight up without any blips, although it’s close. The S&P has rallied nearly 20% since November and a remarkable 75% since the lows of last March. This is already a bull market for the ages with the fastest start, meaning the steepest move higher in the first year, since the early 1930s.
The situation begs a question. How long can it last?
But that might be the wrong question. What’s true for the overall market index doesn’t necessarily present an accurate picture of what goes on under the hood. Some stocks and sectors are overvalued while others - like energy and financial stocks - are still cheap. And the driving force behind the market ascent is changing dramatically.
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The first eight months or so of this bull market was driven by technology. The sector soared in the pandemic as people relied on technology more than ever during the lockdowns. The tech-heavy Nasdaq index was up over 40% for calendar 2020.
Cyclical stocks got creamed for most of last year as the lockdowns crippled the Main Street economy. The energy and financial sectors were by far the worst performing on the S&P and were still very much in a bear market until the end of last year. But the vaccines are changing everything. And a completely different picture is emerging.
Energy and Financial Stocks on the Rise
The vaccines promise to end the pandemic. The removal of the remaining restrictions will unshackle the economy and unleash a full recovery later this year. That promise is reigniting energy and financial stocks as a full recovery will create a demand for oil and gas and loans that makes up for lost time. And yesterday’s losers have become today’s biggest winners.
Since September 23, the SPDR S&P Bank ETF (KBE) has soared over 79% and the Energy Select Sector SPDR Fund (XLE) is up 60%. The S&P 500 is only up 21% over the same time. These two sectors have been by far the best performing of the 11 S&P 500 sectors for the past three-month, year-to-date and one-month periods.
This past week the overall market has trended downward on fears of higher inflation and higher interest rates as the recovery accelerates while the country is awash in trillions of Federal stimulus. But energy and financial stocks love it, and have had one of the best weeks yet. Banks love higher interest rates as their loan spreads increase. And energy is helped a lot more by a booming economy than they are hurt by higher interest rates.
Sure, the overall market may be a little frothy. And the S&P could certainly pull back or correct in the near term. But energy and financial stocks still have a lot of upside left at this juncture. For many of these stocks, it’s still May.
The new dynamic is providing a great lift to the previously downtrodden energy stocks Valero Energy (VLO) and Chevron (CVX). These stocks offer value and high yield in an expensive market and a low-interest-rate world.
Editor’s Note: This post was excerpted from a recent issue of Cabot Income Advisor.
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