Weekly Market Trends

As Markets Decline, Energy Heats Up

Energy prices are likely to rise this winter, despite the downward trend in the broader market. As inflation looks likely to persist, the oil and gas exploration and production industry — which has shown sensitivity to inflation — may help bolster equity portfolios.


Senior Research Strategist

Both equities and fixed income resumed their downward trend last week, as hotter-than-expected Consumer Price Index (CPI) inflation sent 10- and 2-year Treasury yields to highs not seen in more than a decade.1 The yield curve remains inverted as the 10- and 2-year yield spread has been negative for more than 70 days now.2 This inversion is the longest since the Global Financial Crisis.

Housing Market Slows

Mortgage rates now stand at multi-decade highs. The National Association of Home Builders (NAHB) Housing Market Index and other housing sector data are likely to show further slowdown in the housing market.

Q3 Earnings Season Begins

Big banks kicked off the Q3 earnings season. So far, they are generally reporting lower profits, higher net interest margins, and significant declines in investment banking fees.

Watching Inflation Around the Globe

Eurozone and UK inflation will likely continue trending higher in September. In the UK, Prime Minister Liz Truss reversed more of her government’s tax-cut plan, after already suspending an initiative to cut the top rate of income tax. Truss also fired Treasury chief Kwasi Kwarteng to shore up support in her party.3

China’s 20th Communist Party Congress opened on October 16, 2022. Investors will likely pay close attention, looking for signs of changing COVID policy and key senior leadership changes. Both could impact the growth outlook of the second largest economy.

US CPI Inflation was higher than expected for September, as core CPI inflation reached a new high.4 The news raised market expectations for a steeper rate hike at the November Federal Open Market Committee (FOMC) meeting.

The University of Michigan’s Consumer Sentiment Index improved in October, reaching a six-month high.5 Yet inflation expectations for the year ahead rose for the first time since March. Perhaps unsurprisingly, September US retail sales were little changed from August as, amid high inflation, consumers pulled back spending on big purchases.6

Preparing for Winter Energy Prices

The energy sector’s earnings outlook and sentiment remain strong as analysts further upgrade the sector’s earnings growth estimates to 146% for this year7 — despite recession concerns and the fact that weak Chinese demand has weighed on oil prices.

Energy prices are likely to rise this winter, boosted by OPEC Plus’ larger-than-expected production cut, multi-year-low inventories, and continued global supply disruption. This may help support oil and gas explorers’ and producers’ profitability amid an earnings slowdown in the broader market.

US Crude Oil and Petroleum Products Inventory at Five-Year Low

US Crude Oil and Petroleum Products Inventory at Five-Year Low

Implementation Idea: SPDR® S&P® Oil & Gas Exploration & Production ETF (XOP)

September’s stronger-than-expected CPI inflation data underscored the persistence of inflationary pressures. The oil and gas exploration and production industry has shown the greatest sensitivity to year-over-year CPI inflation among 21 S&P Select industries,8 making it a potentially powerful tool to defend equity portfolios in an elevated inflation environment.

In addition, with one of the lowest correlations to the broad market since inflation began surging last year,9 the industry could potentially provide diversification benefits and resilience to a core equity portfolio. And despite recent strong performance, valuations for the oil and gas exploration and production industry remain attractive, trading near a 70% discount to the S&P 500® Index based on forward P/E ratio.10

To capture strong profitability and attractive valuations in the oil and gas industry, consider the SPDR® S&P® Oil & Gas Exploration & Production ETF (XOP). And with $4.5 billion in assets, XOP is the third-largest ETF in its Morningstar category.11

XOP Standard Performance as of September 30, 2022

XOP Standard Performance as of September 30, 2022

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