Biotech and Technology Remain Under Pressure
The sharp uptick for stocks came amid a jump in industrial production and a strong rebound in U.S. retail sales, which increased by 1.1% in March, their best showing in 18 months. Also helping stocks were solid earnings from several blue chip companies, including Johnson & Johnson, Intel, Coca Cola, Yahoo and Morgan Stanley.
While the broad averages posted their best performance in weeks, some segments of the equity market are still showing signs of stress. In particular, biotech indexes remain 16% off of their recent peaks. Meanwhile, technology sector darling Google saw its share price sink on disappointing earnings, with expenses surging and revenue coming in slightly below expectations. Finally, initial public offerings (IPOs) are also bearing the scars from the recent sell-off. Early in the week, cloud-based payroll software maker Paycom Software priced its IPO well below forecasted levels.
Oil Investors, Meanwhile, More Focused on Ukraine
By most fundamental measures, oil prices should be declining. In fact, the Energy Information Administration announced last week that oil inventories in the U.S. are approaching an all-time high. Furthermore, data showed the biggest one-week increase in stockpiles in 13 years, with inventories rising by 10 million barrels to 394.1 million, only 3.4 million below the all-time peak reached in May 2013. While strong U.S. production and rising inventories should keep a lid on prices, events outside the United States are putting upward pressure on oil.
First, production in several key Middle Eastern and North African producers — Libya, Nigeria and South Sudan — are well below potential, helping to limit global supplies. In addition, fears of escalating violence in eastern Ukraine and potential sanctions against Russia, the world's second-largest oil producer, are pushing prices higher. While equity investors may be ignoring events in Ukraine, oil traders are not, with oil prices hitting a six-week high.
Energy Stocks May Offer Some Protection
We are advocating an allocation to energy stocks, which have outperformed the broader market year-to-date. In addition to being one of the cheaper sectors and a good hedge should inflation eventually start to rise, the sector provides another important feature today: a potential hedge against rising geopolitical risk. Should events in Ukraine continue to deteriorate and lead to an escalating series of sanctions and higher oil prices, energy stocks are likely to perform better than the broader market.