Never Sell Your Energy Stocks - Nick Colas and Jessica Rabe of DataTrek

Josh Brown (0:13)

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Click the link in the show notes for more. We're back. I miss you. I miss you guys.

Nick Colas (0:55)

Hello.

Josh Brown (0:55)

I miss you too.

Jessica Rabe (0:57)

Of course. Always.

Josh Brown (0:58)

All right. Hey, everybody. Welcome to an all new edition of What Did We Learn? I'm here with my friends Nick Colas and Jessica Rabe. They are the co-founders of DataTrek Research and the author of DataTrek's Morning Briefing Newsletter, which goes out to over 1,500 institutional and retail clients. Nick and Jessica also have their own YouTube channel, which you can find a link to in the description below. And I'm told your YouTube channel is now blowing up. That's pretty exciting for me to hear. You guys pumped?

Nick Colas (1:29)

Here we are.

Jessica Rabe (1:29)

Thank you. We're trying to put out as much as we can.

Josh Brown (1:33)

All right. Stay modest. All right. Welcome back. This is what I want to talk to you about first. Nick, you told me something a very long time ago, and you've repeated it since. And I think it's been super helpful for me and also for the people in our audience. You can never really sell your energy stocks because that's your only hedge against an oil price spike. And right now we are living through one of the all time great oil price spikes.

I guess, just in terms of the speed with which it happened. And that adage of yours has proven itself to be very true. When I look at the various stocks that I'm involved in this year, outside of utilities and a handful of industrials, it's really just the energy stocks that are working. And what's interesting about saying that these days, I think energy got down to 2% of the S&P as a sector weighting, which is maybe the smallest that I've ever seen it since I've been in the industry. And so, the temptation to just say, last year, why do I own these stocks? They never go up. They're so tiny, they don't do anything in relation to the overall market. That's been flipped on its head this year. Is that the way you see it?

Nick Colas (2:52)

It is, it's kind of crazy. When I started looking at the stock market in 1980 when I was in high school, energy was 20% of the S&P. And it got to 2%, which just tells you all you need to know about how those stocks have worked over a very long holding horizon. The way I think about it really is anchored in the 1990 experience. And we have a little chart to put up and kind of talk to these and we can discuss this group. But back in 1990, we had a somewhat analogous situation to today where Iraq invaded Kuwait, kind of out of the blue. And oil prices very quickly doubled. And the way the market traded that event was oil peaked in mid-October, long before Gulf War I started in January and February of 1991 Oil peaked roughly $40, $45 a barrel over a double versus just a few months prior. So that was the oil shock. Energy stocks traded very well through that peak in oil and not so well afterward. And stocks bottomed on the day of the oil price peak in mid-October. So the S&P hit its bottom for that event long before military action, long before anything was really known about how Iraq was going to get kicked out of Kuwait. But oil prices were the real tell. And oil prices right now, as we know, are hitting new highs literally as we speak. 102, I think, was the level I saw before I came on the screen.

And energy stocks are making a new high today as well. To me, that kind of implies that the market hasn't bottomed yet, if we're using the 1990 playbook as an example, which I think is fairly robust, because the two situations are somewhat comparable. And so you end up with a situation where the market's going to have to pay attention to oil prices. That's going to be our tell. And until oil prices stabilize, and it can happen long before we know the military outcome, but they will still keep rising until that uncertainty peaks out. And it hasn't happened yet.