Oil stocks see influence shrinking everywhere

Bloomberg

Everyone knows the rapidly shrinking energy sector has seen its influence on equity indexes wane. But oil-and-gas companies are also losing pull in a corner of the market they once dominated: value stocks.
How far have they fallen? As recently as 2012, correlations between the S&P 500 Value Index and the benchmark’s energy companies were often close to 1, meaning perfect lockstep moves. Now it’s about half that, slipping to the lowest in nine years.
Several things explain the divorce. Just as it has in broader indexes, energy companies’ shrinking size has left them with less clout to sway the value category as a whole. Another factor is oil, a commodity that bounces around so much nowadays that anything tied to it stands an equally good chance of coming untethered from the rest of the market.
“Oil is still a big driver of the energy sector, but not so much for other value sectors,” Brian Jacobsen, chief portfolio strategist
at Wells Fargo Fund
Management, said by email. “Investors may be hesitant to fish for value as they wait with bated breath to see if the latest oil price dip was a prelude to a bigger drop.”
Diminishing correlations could be a disappointment for energy bulls who have pinned their hopes on investor appetite turning back to value stocks. Evidence of such a transformation has surfaced recently, with the S&P 500 Value Index rising in three of the last four weeks and its growth counterpart gaining in just one.
That the gauge is advancing even as energy shares remain the worst performers of 2017 indicates their waning significance. While all but two of the 34 members of the S&P 500 Energy Index show up in the value gauge, they are now only the fourth-biggest industry group in the value gauge, down from second before the 2014 crude slump.
Moves in oil, once seen as an economic proxy, are now dictated more by
the sector-specific narrative of supply outlook. Ari Wald, an analyst at Oppenheimer & Co. in New York, expects the high volatility to last for the next several quarters or possibly even years. WTI crude rebounded 1.8 percent, following its biggest slump in four weeks.
“Typically, supply has been constrained and thus a strong economy has been correlated with a strong equity market, including strong performance in oil and energy, but this time around supply is not tight so the relationship is not there,” Peter Garnry, head of equity strategy at Saxo Bank A/S in Copenhagen, said by email.
Although the declines have made energy stocks cheaper than they were a year ago, the potential for more oil swings have kept value investors at bay. Crude surged after OPEC and its partners agreed to production cuts in November, before supply woes dragged it back to prices last seen before the deal was signed.
“Energy is likely not considered ‘value’ at this point due to the vulnerability of the sector to large swings in oil prices, driven not by the usual cyclical factors but rather by secular issues tied to supply and demand,” said John Stoltzfus, chief investment strategist at Oppenheimer Asset Management in New York.