While tech stocks have led much of the stock market recovery from the March crash, the energy and financial sectors have lagged. However, today's 53-point gain by the S&P 500 Index (SNPINDEX:^GSPC), good for a strong 1.6% move higher, was driven by the laggards; the Energy Select Sector SPDR ETF (NYSEMKT:XLE) and Financial Select Sector SPDR ETF (NYSEMKT:XLF) gained 2.6% and 2.3%, respectively.
Laggards leading the way today were oil producers Devon Energy (NYSE:DVN), and Diamondback Energy (NASDAQ:FANG) up 11.1% and 5.3%, respectively, while financials including asset manager Invesco (NYSE:IVZ), insurer Lincoln National, and regional bank Regions Financial (NYSE:RF) shares led the sector with 6.3%, 4.7%, and 4.6% respective gains. Boeing (NYSE:BA), another laggard in a struggling industry, also had a good day, with shares up 6.4% on expectations the 737 Max is set to return to the skies soon.
On the downside, there's not a lot to report; almost 95% of S&P 500 stocks gained value today, and the worst performer, Westrock, was down only 2.3%. Only three more S&P components lost more than 1% on a day when the sentiment was widely positive.
Merger news driving oil stocks higher
Devon's sharp move higher today came following news that it had agreed to join with fellow independent oil producer WPX Energy (NYSE:WPX), in a merger that would create a $12 billion combined business. Investors are bullish on the deal, sending WPX shares up 16%, since it the combined scale of the two would result in significant savings, allowing it to break even on oil production at $33 per barrel.
Investors are also optimistic that this is a signal that more merger and acquisition deals could happen soon in the deeply troubled oil patch. Devon and WPX are two of the better-run independent producers, and the merger should help them be even more competitive against global heavyweights if oil prices remain depressed for an extended period of time. Investors are hopeful that other oil companies could find partners to combine with, or opportunities to begin selling off assets to clean up balance sheets that have become bloated with debt.
Financials move higher on post-COVID recovery hopes
While the reality is that the coronavirus pandemic is far from over, there remains optimism that medical help is on the way, and hopefully sooner rather than later. While it's debatable exactly what "sooner" really means, eventually, the post-COVID recovery will indeed happen. And historically, cyclical businesses like banks, which struggle more during a downturn, have been outperforming investments during the recovery cycle.
We have certainly seen financials lag so far, with the Financial Select Sector SPDR ETF down 22% this year, and only bettering energy stocks in sector performance:
Going forward, there are still real concerns for the financial sector. Tens of millions of Americans are unemployed, and it's likely more of the job losses reported in recent months are permanent losses, not furloughs. As long as major parts of the economy remain impacted by the health risks of the coronavirus, lenders, insurers, and financial services providers will have to navigate a weak economic environment. And that's before considering the implications of all-time low interest rates impacting bank earnings.
The takeaway is yes, indeed, financials are still lagging the market as the recession continues, and yes, that same recession will continue to weigh on many. But the financial sector is far stronger than it was a decade ago in the prior global recession, so the risks are lower for investors. The question that remains unanswered is exactly when the post-COVID recovery cycle that's so great for financials will actually happen.
Boeing bouncing higher on 737 MAX expectations, hopes for lifeline for airlines
The past couple of trading sessions have been good for Boeing investors, with shares gaining almost 14% since Friday. According to European regulators on Friday, flight tests to evaluate changes to the aircraft have been completed, and the jet could be approved to return to commercial flights in November.
Buyers kept buying Boeing shares today, at least partly due to continued high hopes on recertification of the 737 MAX, but also due to some potentially positive news for the commercial airline industry in the form of more financial support from Congress on the table. Negotiations are ongoing for $2 trillion in stimulus, and investors are expecting some of that money will go to airlines for payroll support. Shares of Delta Air Lines (NYSE:DAL) and United Airlines (NASDAQ:UAL) gained over 5% on today's news.
That's a sharp increase considering there's nothing concrete to report, and after months of back-and-forth and stonewalling, it's risky to predict anything happening in the five weeks before the election. Boeing has burned some $10 billion in cash during the coronavirus downturn, while its most important customers, commercial airlines, are facing a fight for survival. The worst may be over in some ways, but the path forward for Boeing and many of its airline customers is still fraught with risk.