These stocks hold the key to market returns in 2021

The stock market pushed further into record territory on Friday, ending a remarkable week. There are currently a lot of uncertainties in the market, but investors are nonetheless confident that everything will turn out well. Market participants generally dismiss pessimistic news on things like low levels of job creation and the record number of COVID-19 cases, instead believing that coronavirus vaccines will eventually bring the pandemic under control and spur a new one. wave of expansion.

With optimism reaching exuberant levels, the question is whether the stock market can keep pace in 2021. Answering this requires looking at a particular set of stocks. They don’t represent a big chunk of the market, but how they fare could make or break 2021 as a winning or losing year.

How the stock market performed on Friday

The main market benchmarks have reached record territory, Dow Jones Industrial Average (DJ INDICES: ^ DJI) join the S&P 500 (SNPINDEX: ^ GSPC) and Nasdaq composite (NASDAQINDEX: ^ IXIC) to new heights. The gains for all three indices were relatively consistent with each other.

Data Source: Yahoo! Finance.

The answer is energy

Energy stocks have long been off the radar of most investors. That’s for good reason: Energy stocks as a group are down more than 30% for the year, compared to S&P 500 overall returns of more than 15%.

The challenges facing the oil and gas industry come from two sources. Even before the outbreak of the COVID-19 pandemic, supply and demand factors were out of balance in the energy sector, in large part due to advancements in shale oil recovery technology and other unconventional assets. Then, when the pandemic struck, the bottom of the crude oil market fell, briefly turning prices negative as demand evaporated overnight.

Yet by ignoring energy, many investors missed a huge recovery. As of early November, energy stocks were down 50% for the year. Yet in the last month alone they have jumped almost 40%.

Energy stocks played a key role in Friday’s stock market gains. Oil prices topped $ 46 a barrel, rising slowly but steadily to more sustainable levels. As a result, many of the best performing large cap stocks have come from energy:

• ConocoPhillips (NYSE: COP) picked up more than 7%, while EOG Resources (NYSE: EOG) was 10% higher and Canadian natural resources (NYSE: CNQ) posted a gain of 5%.
• Among refiners, Phillips 66 (NYSE: PSX) gained 7%, with Valero Energy (NYSE: VLO) just behind with an increase of 6%.
• The petroleum services sector also performed well, with Schlumberger (NYSE: SLB) and Baker hughes (NYSE: BKR) gaining 6% to 7% over the day.

Energy performance indicates that investors are turning to the sector. This is good news, although the size of the energy sector has shrunk significantly relative to the rest of the stock market in recent years.

Why energy is important

Energy stocks are only a small part of the overall market, so it may seem like their performance shouldn’t matter. But as a cyclical component of the economy, energy drives many activities not only within the sector, but also in related fields such as industry and materials. A cyclical rise would ultimately bring many laggards to the bull market since March, widening the rally and making it more sustainable.

In contrast, another blow to energy would be a blow to confidence in the economy. Tech stocks have done a good job of bearing more than their fair share of the burden of sustaining the economy, but the tech sector can’t do it all on its own. Stock market gains in 2021 will depend in part on the contribution of other sectors.

Even though most investors pay close attention to the latest high-tech entrants, you need to keep an eye out for energy stocks. They’re quietly producing good returns for those betting on a quick turnaround, and there could be a lot more momentum going forward.