As a freelance finance writer, I get a steady feed of financial news stories and articles. I thought I would share this one from investors.com.
A lot of financial writers are under instructions to post something every day, or even several times a day. Under those circumstances, they can’t all be diamonds, but this one about 2021’s runaway sector, is cracking me up.
For those of you not paying attention, today is January 14. That just the 9th trading day of the year (New Year’s Day is a holiday, plus weekends). So the sector that’s running away “so far” in 2021 is not exactly a meaningful time period.
Why Are Energy Stocks Up?
Saudi Arabia announced it would cut production. As the world’s largest oil producer, that is big news to the energy markets and resulted in oil prices rising, even though Russia says that it will increase production because it doesn’t want U.S. shale oil markets benefiting from the higher prices.
Whatever higher oil prices happens to trickle through is good news for U.S. oil producers, hence the quick runup in the last few days to make it the “runaway” sector for 2021… so far.
My favorite part is this
Energy stocks are outpacing the S&P 500’s 1.6% gain this year by more than 700%. Four of the top five S&P 500 stocks this year so far are in the energy sector. And don’t think it’s just one of many lucky sectors. The S&P 500 energy sector’s rise this year is more than double the 6.2% gain of the next-best sector: Financials.S&P 500: You’re Likely Missing Out On 2021’s Surprising Top Sector | Investor’s Business Daily
You see, financials are only up 6.2% in 9 days. Anyone want to annualize that out?
Are Energy Stocks a Good Investment
As always, the energy sector is highly affected by oil prices, which are usually well controlled by OPEC + Russia. For these last nine days, those prices have looked good, and energy stocks have responded accordingly.
The reason, however, energy doesn’t make up a lot of a many portfolios is its volatile nature. If Russia decides not to pump the extra oil, or if Saudi Arabia decides it won’t hold onto its cut, those oil prices will fall, and along with it these same energy ETFs.
The other issue is that there is sort of a soft-ceiling on energy stocks and oil prices. The higher the price of oil, the more producers — especially U.S. shale producers — start turning on the flow of oil. More oil means lower prices, so unless higher demand meets up with higher production, there is a limit on how high oil can go without opening up the spigots. Even worse, if that demand drops, that extra oil takes a long time to work out of the market it isn’t always cheap, or easy for producers to turn off production once it is started up.
Energy stocks, and energy ETFs, have a place in a diversified portfolio, but if you think you are buying into the hot trend for 2021 based on 9-days of news powered increases, you may be in for an unpleasant surprise. It wasn’t that long ago I was writing about the crash in oil prices.