In late 2018, the E-Mini S&P 500 futures contract traded to a low of 2316.75. Even though the risk-off period caused by the coronavirus pushed the futures to a lower low of 2174 in March 2020, the futures came storming back and were trading at the 3278.25 level at the end of last week. Compared to the 2018 low, the E-Mini was over 41.5% higher over the past two years.
The magnetic force of the stock market was…
not strong enough to carry two sectors higher. Energy-related shares and airline stocks have underperformed the stock market. Crude oil and natural gas are fossil fuels. When it comes to the environment, as investments, they joined the ranks of coal over the past years. Airlines have always been a troubled business. In the past, low oil prices had been a supportive factor for airlines. However, the global pandemic caused travel to grind to a halt.
Both sectors accumulated substantial debt levels with interest rates at historically low levels over the past twelve years. Airline and energy companies face a business environment where servicing those loans has become more than a challenge.
Warren Buffett is a value investor. During past financial crises, he burst on the scene to purchase beleaguered companies. Earlier this year, as risk-off conditions created bargains, the Oracle of Omaha uncharacteristically sheds his position in airline stocks.
The stock market made an impressive comeback in a V-shaped recovery since the March 2020 low. However, energy and airline stocks continue to be the redheaded stepchildren that have underperformed almost all other sectors. The ugliest performance during one period can often lead to the best opportunities. The prolonged crash course for airlines and energy companies could give way to a substantial recovery over the coming years. A reward is always a function of the risk of an investment. Airline and energy-related companies are risky as we move towards the end of 2020, but that could change in 2021 if the threat of the virus recedes and economic conditions improve.
Bearish price action in airlines and energy
The US Global Jets ETF product (JETS) holds shares of the leading airlines, including:
Source: Yahoo Finance
The JETS product holds an almost 21.5% exposure to Southwest Airlines (LUV) and Delta Airlines (DAL) with total net assets of $1.55 billion. An average of over 4.9 million JETS shares change hands each day, and the ETF charges a 0.60% expense ratio.
As the chart shows, JETS dropped from a high of $34.75 in early 2018 to a low of $11.25 in March. The ETF was trading below the $17 per share level at the end of last week.
The top holdings of the Energy Select Sector SPDR Fund (XLE) include…
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