Markets “In a Nutshell” for September 24, 2019
Investment Week at a Glance
Stocks were down last week. The Dow Jones Industrial average dropped 1.0% while the S&P 500 fell 0.5%. The New York Stock Exchange Composite (2,000 stocks) fell 0.2%. The “average investor’s index” (Value Line index) was down 1.2%. Foreign stocks (EAFE index) slipped 0.3%. Bond yields dropped (bond prices up) as the 10-year Treasury ended at 1.75%. (Data sources: Barron’s Financial, Wall Street Journal)
Oil Prices React to Terrorist Attacks
The price of a barrel of oil went on a wild ride this past week. Oil prices spiked 10% early in the week when Iran launched drone attacks at critical Saudi Arabian oil fields. Prices dropped later in the week as damage to the oil fields were not as bad as previously thought. For the week, oil prices still gained 6.7%. Oil prices have increased 28% in 2019.
Oil (Energy) Stocks Lag and Are Inexpensive
As we wrote above, oil prices have increased 28% this year. Despite the rise in oil prices, energy stocks have lagged with gains of only 5% this year. Energy sector stocks have suffered the past 5 years with losses of 25% the past year and 3 and 5-year average returns of minus 7% and 14% respectively. We see this subpar performance as opportunity. History would tell us losses don’t last forever and a reversion to positive returns eventually occurs. Of course timing is the key and difficult to predict but we are building small energy positions at this time.
Another Reason to Take a Look at Energy Stocks
Besides the relative value of energy stocks, another reason we are looking at the sector is for yield and dividend income. As interest rates drop worldwide (again) the dividend yield on energy stocks look juicy. The energy sector etf XLE, which owns 28 of the top energy stocks, yields 4.1%.
Fed Cuts Rates
The Federal Reserve cut short term interest rates last week with a target of 1.75%-2%. As the move was expected, Wall Street reacted to the news with muted enthusiasm. Look for continued cuts during the last part of the year as the worldwide economy slows further. The European central bank and other central banks from around the world have cut rates and taken other measures in an attempt to stave off economic recession.
As we wrote above, the price of oil spiked up almost 7% last week to $58 a barrel. What was the all time high price for a barrel of oil?
Answer is below.
Have a good week!
Answer to quiz:
d. $145 in June, 2008.