The energy sector can heat up in an instant and push through resistance lines equally as fast as high-growth tech stocks can.
This was evidenced year-to-date (YTD) as an energy crisis in Europe and across the world is brewing and pushing up the stock prices of energy companies.
As a case in point, the exchange-traded fund (ETF) Energy Select Sector SPDR ETF (NYSEARCA: XLE), which tracks the performance of the energy sector, posted a return of over 38% YTD, while the S&P 500 and the Nasdaq returned a -18.52% and -27.08% YTD, respectively.
Jefferies analyst Chris Wood joined Bloomberg Markets to discuss the state of the markets and market segments where he sees potential value while reiterating his stance on energy stocks.
“The key point, for now, is you want to own my key favorite sector in equities, and that remains what it’s been for the last two years, and that’s energy stocks.”
Reason for energy
Wood elaborated that he is bullish on the energy sector as he sees no significant demand destruction for energy in the western economies.
“I want to have energy stocks because, as a fundamental hedge. Because the obvious risk to energy stocks is demand destruction caused by slower economies. Energy stocks have corrected on that demand destruction theme since the highs in about June. But the reality is that there’s not much evidence of demand destruction in the western world for energy.”
He also added:
“As of today, the only evidence of demand destruction on energy right now and oil is in China. So in that sense actually, President Xi is doing the rest of the world a big favor because the oil price would be materially higher today if China was fully reopened.”
Furthermore, the supply chain issues are exacerbating the energy crisis; while the attack on fossil fuels in the past couple of years has shifted the world towards renewable energy; yet, that shift was not done fast enough.
At the moment, the demand for oil and gas will likely stay high, keeping energy stocks elevated. Therefore, as a sector, energy seems a compelling invite for market participants.
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