Wall Street conventional wisdom says that if you want to know how energy stocks are trading, check the price of oil. But these days investors could do just as well looking at how banks are doing.
(Bloomberg) — Wall Street conventional wisdom says that if you want to know how energy stocks are trading, check the price of oil. But these days investors could do just as well looking at how banks are doing.
The correlation between the S&P 500 indexes for energy and financials climbed to 70% over the past year, data compiled by Bloomberg shows. This week, it hit the highest point since the beginning of 2022, before Russia invaded Ukraine and sent oil prices skyrocketing, lifting energy stocks at a time when other sectors were falling.
For perspective, energy and bank stocks are trading nearly as tightly as energy and oil prices. The energy index is currently 71% correlated to the price of West Texas Intermediate oil.
“For the second time in a few months we have seen energy stocks trade tightly in line with financials, and perversely underperform bank stocks in what is supposedly a banking crisis,” Ninepoint Partners partner and senior portfolio manager Eric Nuttall said.
Since Silicon Valley Bank failed on March 10, the Energy Select Sector SPDR Fund has dropped by 5.5%, underperforming the Financial Select Sector SPDR Fund, which has been down 4.6% in that period.
“This is a bit of a domino effect, where concerns about the health of banks pushes bank equities lower and that raises concerns about the overall health of the economy and drives risk-off sentiment, which then drives oil and energy stocks lower,” said Stacey Morris, head of energy research at VettaFi in Dallas, adding that the lockstep performance of oil and bank stocks may persist.
The banking turmoil coupled with weak gasoline demand have erased all of the gains crude oil enjoyed from the OPEC+ production cut. Crude oil has fallen to about $67 from more than $80 at the end of March.
It has been frustrating for energy investors as oil prices slide and shares of well-capitalized energy companies dip.
Energy stocks have “historically been very correlated with economic conditions,” Roth MKM analyst Leo Mariani said, adding that energy and financials are both value sectors, and often move in tandem.
“Every time that we’ve had a major recession, energy stocks tend to get crushed and be among the worst-performing sectors out there,” Mariani added.
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