Oil Rout Liberates S&P 500 From Energy as Tech Gains

Updated on

The five-month plunge that lopped 29 percent from the price of oil has left energy stocks with the weakest influence on U.S. equities in nine years. For investors tiring of volatility, that’s a good thing.

Oil and gas producers in the Standard & Poor’s 500 Index plunged as much as 20 percent since June, squeezing their share of the gauge to 8.9 percent, the smallest since 2005. That’s down from 16 percent in 2008 and put them as the seventh among 10 industries, data compiled by Bloomberg show.

Liberating the biggest stock measure from the vicissitudes of commodity markets will reduce volatility and attract investors as industries such as technology and health care thrive, said Brad McMillan of Commonwealth Financial Network. Energy shares fell about twice as fast as the full index during the September-October retreat as concern over a global economic slowdown and a glut of supply sent oil to the longest slump in almost three decades.

“Oil prices have been notoriously volatile for many years,” McMillan, chief investment officer of Waltham, Massachusetts-based Commonwealth Financial Network, which oversees $86 billion, said in a phone interview. “Because there is such a knock-on effect, the less important energy becomes to the index, that’d probably reduce market volatility as a whole going forward.”

Oil Effect

Oil’s slide pushed energy shares down 20 percent over the four months through October, contributing almost half of the 4.3 percent loss in the S&P 500. Without energy, the broad index’s decline over the stretch would have been 2.4 percent, according to data compiled by S&P Dow Jones Indices.

The equity market has since recovered all the losses as better-than-forecast corporate earnings and improved data on employment and manufacturing sent the benchmark index to all-time highs. The S&P 500 Energy Index is still 15 percent below its June peak, hurt by crude prices that broke $75 a barrel for the first time since 2010. The broader gauge fell 0.1 percent at 9:45 a.m. in New York today, while the energy measure dropped 0.7 percent.

“Investors should be happy that energy is such a low weight in the S&P because it obviously has a lot less impact than it would have been,” Wayne Wilbanks, who oversees about $2.5 billion as chief investment officer at Norfolk, Virginia-based Wilbanks, Smith & Thomas Asset Management LLC, said by phone. “The quick rebound in the market was in part fueled by people stopping and then going, ‘You know what? Oil staying at $75 -- that’s great for everyone else.’”

GDP Impact

U.S. gross domestic product will get a net 0.5 percentage point boost over the next year from crude’s retreat, taking into account a pickup in consumer spending and cutbacks in business investment by the oil industry, according to a forecast by JPMorgan Chase & Co. Estimates from Goldman Sachs Group Inc. put the increase at 0.1 point in 2015.

The S&P 500 climbed 0.4 percent last week for its fourth straight gain amid investor confidence that the world’s largest economy will weather a global slowdown. U.S. GDP posted the biggest back-to-back quarterly increases since 2003 and the unemployment rate fell to a six-year low.

Energy shares dropped 2 percent last week, sinking with crude as concern grew that supply is outpacing demand. A surge in shale drilling has lifted U.S. production to a three-decade high while members from the Organization of Petroleum Exporting Countries including Saudi Arabia and Kuwait have resisted calls to cut output. U.S. oil, which peaked around $107 a barrel on June 20, last settled at $75.82 after dropping for a seventh week, the longest stretch since 1986.

Energy Renaissance

“The decline in oil prices is not simply a function of slower global growth, it’s also a function of excessive supply, which in turn is being driven by the renaissance in U.S. energy production,” Russ Koesterich, chief investment strategist at New York-based BlackRock Inc., said in a phone interview. The firm oversees $4.53 trillion. “It’s a positive story here, which is you have a lot of supply and that supply is helping the U.S. economy.”

While stocks advanced, investors are parking more money in safe-haven companies whose earnings are less tied to economic growth. Over the past three months, health-care, consumer staples and utilities rose the most among 10 S&P 500 industries, jumping more than 7.5 percent.

The risk aversion reflects the same growth concern that is pushing down oil prices, said Brent Schutte, senior investment strategist at BMO Global Asset Management. A deterioration in crude may spur disruptions in developing countries and the U.S. credit market, where energy represents a bigger share, he said.

Market Disruptions

Oil and natural gas producers make up more than half of the stock market in Russia. In Venezuela, where oil accounts for 95 percent of exports, the yield on the country’s benchmark bonds rose to the highest level since the global financial crisis as sinking crude is undermining its ability to pay debt.

Bonds sold by energy companies now comprise a record 15 percent of Bank of America Merrill Lynch’s U.S. High Yield Index, up from 10 percent at the end of 2007.

“The question becomes, does it become self-fulfilling?” BMO’s Schutte said by phone from Chicago. The firm manages about $240 billion. “I don’t know it does, but certainly it can disrupt certain markets.”

“It has made people worry that somehow the fact that energy is falling is throwing the world into a deflationary spiral,” he said. “That’s the fear that caused volatility.”

Exxon’s Ranking

Energy shares have been closely tied to oil’s ebb and flow. In July 2008, when U.S. crude exceeded $145 a barrel, the group accounted for 16.2 percent of the S&P 500, representing the second-biggest industry after technology.

The steady rise in oil from about $20 a barrel in the 1990s helped companies such as Exxon Mobil Corp. flourish. The Irving, Texas-based energy producer took over General Electric Co. as the most valuable American stock in 2006 and stayed as the No. 1 over the next five years, commanding 5.2 percent of the S&P 500 at the end of 2008, data compiled by Bloomberg show.

After losing $46 billion since June to $403 billion, Exxon’s equity capitalization last week slipped below Microsoft Corp.’s for the first time in a decade, ceding the title of the world’s second-largest company to the software maker.

Energy is the only loser among 10 S&P 500 industries this year, dropping 3.3 percent while other groups have posted gains of at least 3.6 percent. Health-care shares, the biggest winner with a 21 percent rally, have boosted their representation in the benchmark measure to 14 percent, the most since 2009. They rank the third-largest industry, following technology at 19.8 percent and financials at 16.3 percent.

“It’s been energy’s pain, but it’s been a gain for a number of sectors and the economy,” Peter Sorrentino, a Cincinnati-based fund manager at Huntington Asset Advisors Inc., said by phone. His firm oversees $1.8 billion. “Had the same thing happened in financials or any other large sectors, it would have been more damaging.”