I've written on how I believe energy stocks will be the leading sector for 2016 and perhaps beyond, but with recent volatility in equity indexes making trading treacherous, I think it would be useful to get a macro view of markets as they relate to my long-haul energy recommendations.
It is clear that two major macro events have caused major recent volatility in stock indexes – the prospect of the Federal Reserve normalizing rates and the insecurity of the Chinese economy and other emerging market indicators. I want to lend my perspective to both and comment on how they impact my thinking and trading of the energy sector.
The financial world has endlessly ruminated on the schedule of the Federal Reserve and their inevitable move back from a zero interest rate policy (ZiRP) for the last two years. Not a day goes by without CNBC, Bloomberg or the WSJ devoting some space to the latest thoughts and parsings of every Fed governor who's willing to talk. Some on-air economists have made a living making twice weekly appearances on the single question of when the Fed will raise rates.
I have a very smart trader friend who believes that everything that every market has done or will do is overwhelmingly related to this question. Rising stock market? Low commodity prices? High-yield bubble? It's all about the Fed. I do not give quite that kind of overwhelming influence to this one source, but I will say that if you are in the camp that the Fed is encompassing and all-powerful and that nothing else really matters much, you've got to be out of stocks and in cash right now. Further easing is neither likely nor possible and a Fed move away from ZiRP is assuredly coming, even if it doesn't come this month. How much more can you ask of the stock market, if you believe that further gains or possible further losses are incumbent solely upon Fed moves? Not much.
China, on the other hand, shows far less clarity. As some watchers eye the Fed for their key, others equally eye China – although again, I am less convinced that the global economy hinges that strongly on whether Chinese GDP is their claimed 7 percent or the more likely 4 to 5 percent. But, if you believe guys like Jim Chanos, who say that China is now signaling a global recession to come, you'd again be foolish to be in stocks – the negative risks far outweigh the positive ones.
As you know, I am in stocks. I still have quite a bit of cash on the sidelines, but have recently begun to deploy it on energy shares as the markets, and energy in general, has continued to slide. I will continue to deploy more capital in the next several months, barring some third factor we're all not aware of.
My thinking on oil is clear – I've made that available through multiple columns and my book.
But my thinking on the macro equities picture is a little less clear – China to me represents a far greater risk to stock and commodity prices than the Fed, if only because the realities of Chinese growth and the reactions of the Chinese government are impossible to know. But I believe that the realities will turn out to be far less nasty than the doomsayers have it – they almost always are. As for the Fed, if this market is 'surprised' by a 25-basis point rate hike and collapses, then no one has been listening very closely, and I find that equally hard to believe.
In all cases, I believe that oil stocks and energy in general will do far better in 2016 than all other sectors. That means that even in the worst case scenarios of an 'unexpected' Fed hike and full-blown Chinese GDP disaster, I expect oil shares to drop far less than the rest of the market and, should the disaster fail to materialize, perform admirably even if stock indexes stay relatively flat in 2016.
From an investing view then, dividend-paying majors become fine proxies for bonds in a rising rate environment, and more beta-driven E+P's have the potential for huge gains even in a relatively quiet stock year, which 2015 has been and seems likely to repeat in 2016.
So for me, even in the most macro investing sense, I am solid in advocating a sector rotation plan into energy shares for the next year, despite these two unknown and admittedly large issues facing stocks.