Energy stocks are the biggest losers among S&P 500 sectors this year. The sector is down -15% year-to-date, lagging behind the S&P 500 by a staggering 23 percentage points.
Energy’s severe underperformance has everything to do with our #Reflation’sRollover call. In early April, our Macro team said U.S. inflation had reached its crescendo and would begin falling. The components of inflation, especially Energy prices, were lapping bombed out levels from the first quarter of 2016, making for easy year-over-year compares.
The CRB commodities index, crude oil, and breakeven inflation rates all put in their 2017 tops and have been falling. And finally, so has the Consumer Price Index, which has slowed for the third consecutive month in May, decelerating -32 bps to +1.87% year-over-year, the slowest rate in 7 months.
We see continued weakness in inflation and strength in the broader U.S. economy. Want a winning recipe for 2017? We say, short Energy stocks on strength and buy consumer-oriented Tech stocks on weakness.