EDITOR NOTE: 2020 was an awful year for the energy sector. It ended the year with a -37% return. Year to date, however, energy happens to be leading all eleven S&P 500 sectors, up 15%. No other sectors come close. Energy is highly favored among analysts as a potential outperformer, according to FactSet. The drop in the article below pertains to last Friday, a mere dip in what appears to be a trend reversal. But will it reverse? Sector rotation is driven by demand. Are analysts too soon in making a call toward recovery? Sure, Covid vaccines are on the way. What about the unemployment rate that appears to be trending higher by the week? What about the new Covid cases and strains, spreading at a rate seemingly beyond control? What about the new stay-at-home economy, seemingly permanent (i.e. very little traveling involved)? And if analysts are expecting legacy energy companies to thrive, how much longer before early-bird investors begin shifting toward energy's renewable sub-sector counterpart? In short, where’s the demand to validate the optimism? We can’t see it. Can you? Sentiment doesn’t make an economy; it just inflates bubbles.
Wall Street’s main indexes finished lower on Friday, weighed down by big U.S. banks after their earnings reports, while the energy fell sharply due to a regulatory probe into Exxon Mobil Corp.
The S&P 500 banks index lost ground as shares of Wells Fargo & Co, JPMorgan Chase & Co and Citigroup Inc tumbled even though they had posted better-than-expected fourth-quarter profits. The bank sector had rallied sharply in recent days.
Wells Fargo, down 7.8%, was among the biggest drags on the S&P 500, along with Exxon Mobil, down 4.8%.
“Financials and energy have been disappointing ... that’s bringing down the whole market,” said Chris Zaccarelli, chief investment officer at Independent Advisor Alliance in Charlotte, North Carolina.
“This year is the year for financials, energy, materials, industrials. So if there is a day when they’re not leading, it’s not good news for the market.”
Wall Street’s major indexes had recently hit record highs on hopes for a hefty fiscal stimulus package.
Incoming U.S. President Joe Biden late on Thursday unveiled a $1.9 trillion stimulus proposal, which included some $1 trillion in direct relief to households.
Meanwhile, data showed a further decline in U.S. retail sales in December in the latest sign the economy lost considerable speed at the end of 2020.
“The weaker-than-expected economic data, and especially in parts of the economy like retail sales, is a big driver,” said Liz Ann Sonders, chief investment strategist at Charles Schwab.
“We are seeing sentiment through last week in extreme speculative frothy euphoric optimistic territory,” she said.
“Sometimes it doesn’t need a catalyst before it begins to fall on its own weight.”
The Dow Jones Industrial Average fell 177.26 points, or 0.57%, to 30,814.26, the S&P 500 lost 27.29 points, or 0.72%, to 3,768.25 and the Nasdaq Composite dropped 114.14 points, or 0.87%, to 12,998.50.
For the week the S&P 500 and the Nasdaq fell around 1.5% while the Dow lost 0.91%.
Earnings for S&P 500 companies are expected to decline 9.5% in the final quarter of 2020 from a year ago, but are expected to rebound in 2021, with a gain of 16.4% projected for the first quarter, according to IBES data from Refinitiv.
Exxon shares fell after a report said that the U.S. Securities and Exchange Commission launched an investigation of the oil major, following a whistleblower’s complaint that it overvalued a key asset in the prolific Permian shale oil basin.
Declining issues outnumbered advancing ones on the NYSE by a 2.20-to-1 ratio; on Nasdaq, a 2.24-to-1 ratio favored decliners.
The S&P 500 posted 10 new 52-week highs and no new lows; the Nasdaq Composite recorded 169 new highs and seven new lows.
On U.S. exchanges, 14.12 billion shares changed hands on Friday compared with the 12.76 billion average for the last 20 sessions.
Originally posted on Reuters