Barreling Ahead: Energy Sector Lifts Equities

The trade war — and don’t kid yourself, we’re embroiled in an outright trade war — got considerably worse today. But Wall Street enjoyed a reprieve, thanks to countervailing forces in the energy sector.

Stocks rebounded Friday, propelled by rising oil prices and gains in energy stocks. News arrived today that OPEC will stabilize oil supply by boosting production.

Energy was the top performing sector, with the benchmark Energy Select Sector SPDR ETF (XLE) rising 2.01%. Dow components Exxon Mobil (NYSE: XOM) and Chevron (NYSE: CVX) jumped 2.12% and 2.05%, respectively.

The Dow Jones Industrial Average and S&P 500 both closed in the green today. The Dow snapped its eight-day losing streak and was up 201 points at its session high. The Nasdaq bounced around before ending in negative territory, as tech bellwethers stumbled.

Regardless, all three indices posted losses for the week. The culprit: trade conflict. Analysts at JPMorgan Chase (NYSE: JPM) estimate that President Trump’s tough talk on trade already has destroyed $1.25 trillion in market value since March.

I suspect more wealth-destruction lies ahead.

Chinese state media said today that U.S. protectionism was a “symptom of paranoid delusions.” Strong language.

U.S.-China trade relations will further erode on June 30, when the White House is scheduled to unveil a plan to restrict Chinese investments into the U.S. and limit exports of U.S. technology products to China.

The U.S. is now in a trade war with… well, everyone.

The European Union today announced that it would impose tariffs on $3.2 billion worth of U.S. goods that target President Trump’s base. The move comes in response to Trump’s tariffs on European steel and aluminum. China, Mexico, Japan, Canada, and Turkey are preparing similar retaliatory measures against the U.S.

Trump responded today by threatening to impose a 20% tariff on all U.S. imports of European Union-assembled cars. The president harbors a special animus toward Germany and the luxury cars it exports to America.

In the retail sector, stocks remained under pressure following the Supreme Court’s ruling on Thursday that Internet retailers can be required to collect sales taxes even in states where they have no physical presence.

The ruling was unwelcome news for retailers, especially for online juggernaut Amazon (NSDQ: AMZN), which fell today by 0.84%. However, it’s unlikely that the ruling can seriously hamper the long-term growth of e-commerce.

Oil’s well in Vienna…

I now turn your attention to Austria.

At its meeting today in Vienna, OPEC announced that it had reached a compromise to boost oil production by about 1 million barrels per day (bpd), or 1% of global supply.

Major oil consumers such as the U.S., China and India have been pressuring OPEC to dampen the price of crude. Oil prices have been on a tear over the past 12 months, a benefit to the energy sector but an increasing threat to global economic growth.

There’s an old Arab proverb: “All sunshine makes a desert.” This sentiment applies to the upward trajectory of crude prices, which is proving too much of a good thing.

Since last year, OPEC and its allies have been adhering to an agreement to reduce output by 1.8 million bpd. The production curb has helped re-balance the market, which crashed in 2014. Crude had fallen below $27 per barrel in February 2016, posing a crisis for energy producers.

However, tightening the oil spigot has boosted prices by reducing surplus production capacity (see chart):

Oil prices today soared. West Texas Intermediate spiked 5.54% to close at $69.17/bbl. Brent North Sea crude climbed 3.64% to close at $75.45/bbl.

Calm no more…

Last year, the stock market boasted low volatility and steady gains. Those days are over.

Of course, options traders love volatility. For them, wild market swings are nirvana. But if you’re a “steady Eddie” retirement investor, the roller coaster rides have been nerve-wracking.

The upshot: Stay invested, but stay defensive. Avoid the stocks of companies that are particularly vulnerable to a global trade war.

The export-dependent industrial sector has taken a beating lately and for good reason. Pare back your stakes in manufacturers that rise and fall with the headlines on trade.

Rotating into smaller, U.S.-based firms with less overseas exposure makes sense now. As a general rule of thumb, keep a cash level of at least 20% in your portfolio.

Remember the steep declines of February and March? Stocks are just a presidential tweet away from another flash crash.

Friday Market Wrap

  • DJIA: +0.49% or +119.19 points to close at 24,580.89
  • S&P 500: +0.19% or +5.12 points to close at 2,754.88
  • Nasdaq: -0.26% or -20.14 points to close at 7,692.82

Friday’s Big Gainers

  • Tandem Diabetes Care (NSDQ: TNDM) +13.98%

Medical device maker’s insulin pump gets FDA nod.

  • CarMax (NYSE: KMX) +12.86%

Retailer of used vehicles beats on earnings.

  • Extraction Oil & Gas (NSDQ: XOG) +6.91%

Soaring oil price boosts energy producer.

Friday’s Big Decliners

  • Red Hat (NYSE: RHT) -14.11%

Software developer issues weak guidance.

  • Pain Therapeutics (NSDQ: PTIE) -11.51%

Analysts skeptical of biotech’s non-opioid treatment.

  • CareDx (NSDQ: CDNA) -9.45%

Sentiment turns bearish on diagnostics firm.

Letters to the Editor

“What do you think of the stocks of military avionics makers?” — Bill S.

Defense avionics stocks are poised for outsized gains. The world’s air forces are at various aircraft replacement and upgrade cycles, which is good news for the avionics market. Moreover, with their coffers full of “petro-dollars” and tensions in the region rising, Middle Eastern sheikdoms have been in a mood to buy fighter jets.

Questions about sector investing? Drop me a line:

John Persinos is managing editor at Investing Daily.