Bespoke’s Morning Lineup – 12/6/22 – Low-Energy Energy
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“Sometimes, you can learn more from criticism than you can from flattery.” – Doug McMillon
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It’s been a quiet morning for both earnings and economic news, and futures are doing little in response after yesterday’s drubbing. JP Morgan Chase (JPM) CEO Jamie Dimon was on CNBC earlier and said he expects to see a recession in 2023. That echoes comments from UAL CEO Scott Kirby who also expects to see a mild Fed-induced recession while noting that business travel has plateaued. Other CEOs appearing on CNBC this morning didn’t go as far as to use the r-word, but Union Pacific (UNP) CEO Lance Fritz sees the economy and consumer slowing driven by weakness in housing, and Walmart CEO Doug McMillon said he sees the low-end consumer being pressured as the percentage of consumers making more than $100K per year visiting stores increases.
Yesterday, we were talking about the mixed signals coming from the equity market. Today, it’s the Energy sector’s turn. Energy-related commodities were all the rage earlier this year when Russia invaded Ukraine, setting off the potential for major supply disruptions in both the global natural gas and oil markets. At one point earlier this year, WTI was up over 64% YTD and natural gas was up 160%. That helped to push the Energy sector to a gain of over 70% on the year while just about every other area of the market was down YTD, and in many cases, down big.
Since the initial hysteria in Energy markets earlier this year, energy-related commodities have come crashing back down to earth. Over the last six months, WTI is down 35%, and natural gas is down 40%. With declines of that magnitude, you would expect to see Energy stocks under heavy pressure, but during that same span, the Energy sector is down less than 1.5% and still up 58% YTD. To be sure, even after the recent big declines in energy commodities, they’re still positive YTD, although both natural gas (51%) and crude oil (3%) have trailed the gains in Energy equities.
One explanation given for the outperformance of Energy stocks versus the commodities has been the Biden Administration’s release of oil from the Strategic Petroleum Reserve (SPR) which has acted as an artificial weight on prices. That’s certainly a valid argument, but natural gas has not had to contend with increased supply from an SPR and yet it too is down just as much as crude oil in the last six months. Just when you think you have the market figured out, it throws you a curveball.
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