The Key to the Dow's Bull Market? Energy Stocks

The Dow Jones Industrials looked poised to finish the quarter quietly on Monday, with few stocks making big moves.

Dan Caplinger
Dan Caplinger
Jun 30, 2014 at 12:00PM
Markets

The Dow Jones Industrials (DJINDICES:^DJI) got off to a sluggish start Monday, trading close to unchanged throughout much of the first few hours of trading and falling 13 points as of noon a.m. EDT. From a longer-term perspective, though, many Dow investors are trying to figure out what will sustain the index's 5-year-old bull market -- or what could cause its downfall. Increasingly, it looks evident that energy stocks will make or break the bull market run, and it's important to look beyond Dow components ExxonMobil (NYSE:XOM) and Chevron (NYSE:CVX) to see the impact of the industry on the blue-chip index and the broader stock market.


Photo credit: Flickr/Paul Lowry.

Two big news items
This morning, two key events happened in the energy markets. LINN Energy (NASDAQOTH:LINEQ) agreed to pay $2.3 billion to buy various energy assets from Devon Energy (NYSE:DVN). The deal should help Devon complete its transition plan to sell off all assets it considers to be outside of its core focus, with the vast majority of the sales involving natural-gas producing properties. Like many of its peers in the industry, Devon has tried to emphasize oil and liquids over natural-gas production, as gas prices have tumbled while oil has remained strong. LINN Energy obviously thinks that it's worth taking the other side of the deal, though; within the Dow, both Exxon and Chevron still have plenty of potential exposure to the natural-gas industry because of their major purchases of natural-gas companies during the energy boom.

Image credit Flickr/Lindsey G.

But another event could spell trouble for the energy industry. New York state's highest court allowed local governments to pass zoning laws and other ordinances to prevent hydraulic fracturing from occurring within municipal boundaries. Currently, the ruling is moot, as the entire state of New York has imposed a moratorium on fracking while it assesses the environmental impacts and other consequences of the practice. But the New York Court of Appeals finding means that even if the state lifts the moratorium, companies will have to fight on a local level to gain access to oil and gas resources. Sentiment against fracking in New York is far from unanimous, with dozens of towns having passed resolutions supporting and encouraging it. Nevertheless, with so much potential regulation, oil companies both within and outside the Dow Jones Industrials might well decide that the hassle is too great to justify the potential reward.

Energy plays such a big role in the Dow Jones Industrials because it has an influence not just directly on the companies that produce oil and gas, but also indirectly on many other large industrial companies in the index. Given how important energy's boom has been to helping the U.S. economy recover after the financial crisis, taking away its upward influence could easily end the Dow's bull market.