oil enters a bear market

It has been a rough start to the year for oil, which has entered a bear market after falling over 20% from its early January peak. The market narrative explaining this weakness revolves around the coronavirus and its impact on the world’s largest energy consumer (China). My view is that this narrative is only partially true. While reduced demand in China would certainly be a negative, I think there is probably more at play here. The selloff began before the outbreak became a big story, and energy markets have been dealing with supply and demand imbalances for years as a result of the U.S. shale boom.

West Texas Intermediate (WTI), the U.S. benchmark for oil prices, has declined from over $60/barrel to below $50. Absent a brief period following the 4th quarter selloff in 2018, oil prices are hovering near the lowest levels since 2017.

Source: FRED Database & the U.S. Energy Information Administration. Data as of 2/10/2020

This decline has been painful for energy companies. The Energy Sector ETF (XLE) is down over 10% this year, meanwhile the S&P 500 is up about 4%. Pain in the energy sector, however, has less impact on the stock market as a whole than it used to. In 2009, companies in the energy sector made up nearly 12% of the S&P 500. The weight has since dropped dramatically, finishing 2019 at 4.3% and shrinking further in 2020.

Source: S&P Dow Jones Indices. Data as of 12/31/19. *Real Estate was spun off from the Financial sector post September 16, 2016. **Telecommunication Services was renamed Communication Services, with issues added from other sectors post September 20, 2018

Energy stocks typically carry a heavier weight in value tilted strategies, and have definitely detracted from performance. The silver lining here is that while most U.S. stocks are expensive, the energy sector is priced like a bargain. This should be a tailwind moving forward.

Source Morningstar Direct. The chart compares an equally weighted composite of P/E, P/B, P/S, and P/CF for the S&P 500 Energy index relative to the Russell 3000, which is used as a proxy for the U.S. Market.

Outside of the pain being felt in the energy sector, there is a positive side to falling oil prices. Costs for companies that use oil/energy as an input have declined, which could lead to improved earnings. Additionally, more than two-thirds of U.S. GDP comes from consumption. When costs at the pump fall, those savings can be applied to other discretionary spending. After last year’s peak at about $2.90/gallon, the average price in the U.S. has declined by about 16.5%. Prices in the Midwest have declined further, falling 17.9% to $2.32/gallon. This essentially equates to a tax cut for consumers, and is particularly beneficial for those on the lower end of the income spectrum. 

Source: FRED Database & the U.S. Energy Information Administration. Data as of 2/10/2020

Finally, I’ll leave you with this interesting chart from the U.S. Energy Information Administration (EIA). Ever wonder what goes into the price of gas?


  • One of the most closely watched pieces of economic data is the jobs report published by the Bureau of Labor Statistics (BLS) on the first Friday of every month. The February report, published last Friday, showed the U.S. economy added much more jobs in January (225k) than expected (158k). Much of the overshoot has been attributed to unseasonal warm weather that boosted hiring in the construction and leisure/hospitality sectors. The unemployment rate ticked higher from 3.4% to 3.6%, as more individuals were drawn back into the labor force and began looking for a job.
  • The market is expecting the Chinese government to step in with some additional monetary and fiscal stimulus to cushion the impact from the coronavirus. Stimulus is generally a tailwind for stock prices.
  • Data published by the Institute for Supply Management (ISM) for January showed the services sector grew at the fastest pace in 6 months.  The index increased from 54.9 to 55.5, versus expectations of 55.0 (anything above 50 signals growth). The services sector is much larger than the manufacturing sector in the U.S., and this data suggests no recession in sight. 



  • Tesla’s Stock price Can’t Be Justified. Stop Trying. (Barron’s)
  • The coronavirus is a ‘black swan’ for oil and energy markets, says Ned Davis Research (CNBC)
  • What to Watch for in China Stimulus as Virus Impact Hits Economy (Bloomberg)
  • U.S.-China Trade War Reshaped Global Commerce (WSJ)


  • Believe It or Not (HumbleDollar) Spotting narratives that are worth your attention, versus those that should be ignored
  • Bond Funds are Hotter than Tesla (Intelligent Investor) 1/8th of muni fund assets arrived last year


  • Here Are the Most Common Airbnb Scams Worldwide (VICE)
  • Men’s College Basketball Has Been Chaotic. But Just Wait Until the Tourney (FiveThirtyEight)


Source: Morningstar Direct.

Source: Morningstar Direct.





Source: FRED Database & ICE Benchmark Administration Limited (IBA)

Source: FRED Database & ICE Benchmark Administration Limited (IBA)


Source: MarketWatch

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Josh Jenkins is a Senior Portfolio Manager & Head of Research at Lutz Financial with over nine years of investment experience. He is responsible for assisting clients in the construction, selection, and risk assessment of their investment portfolios. In addition, Josh will provide on-going research and trade support.

  • Asset Allocation & Portfolio Management
  • Investment & Market Research
  • Trading
  • Chartered Financial Analyst (CFA)
  • Chartered Financial Analyst Institute, Member
  • Chartered Financial Analyst Society of Nebraska, Member
  • BSBA, University of Nebraska, Lincoln, NE

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