How pro investors are investing around this energy shock
Professional investors are reshuffling portfolios as crude oil surges past $100 a barrel , rotating into sectors tied to commodities while adding hedges against the risk that geopolitical tensions could trigger a broader economic shock. The jump in energy prices tied to the Middle East conflict is prompting money managers to rethink positioning. Many say the focus now is on maintaining exposure to equities while diversifying across sectors and regions that can better withstand higher inflation and volatility. West Texas Intermediate crude climbed above $100 a barrel in overnight trading for the first time since 2022 after major oil producers in the region cut output amid the continued closure of the Strait of Hormuz. Many on Wall Street view the $100 threshold as a potential tipping point for the global economy unless the conflict eases quickly and prices retreat. The S & P 500 fell for a third straight session Monday after losing 2% last week. Still, even with heightened volatility, U.S. stocks have remained resilient — with the S & P 500 trading only about 4% off its record high. Some investors say the oil rally doesn’t necessarily undermine the case for stocks. “The duration and extent of supply disruptions stemming from the conflict remain uncertain, but we believe a healthy economic and market backdrop provides a measure of reassurance,” said Brock Weimer, associate analyst in investment strategy at Edward Jones. .SPX YTD mountain S & P 500 year to date Carol Schleif, chief market strategist at BMO Private Wealth, said traders are increasingly factoring in the possibility that higher energy costs could push inflation higher while denting economic growth. But she noted that comparable worries surfaced in 2023 and stocks ultimately performed strongly. “This is a midterm election year, and with affordability front and center for the consumer, policymakers will likely pay close attention to any inflation shocks from rising oil prices,” Schleif said. “The nearness of the elections also keeps everyone focused on finding a timely resolution to the Middle East conflict — or policies that can help ease the pain at home.” Small caps to shine? The shock may be accelerating a shift away from the narrow leadership that has dominated markets for years, according to Jason Pride, chief of investment strategy at Glenmede, saying investors are increasingly looking toward smaller companies as they diversify portfolios away from mega-cap stocks. “After nearly a decade of mega-cap outperformance, small caps and more diversified investment processes appear to be benefiting from a rotation in their favor this year,” Pride said. Small-cap companies could gain from potential corporate tax relief and lower interest rates while being less exposed to tariffs and global trade frictions, he said. Quality stocks Morgan Stanley Wealth Management chief investment officer Lisa Shalett said rather than chasing “overhyped themes,” investors should focus on companies delivering real earnings growth. She favors high-quality large-cap stocks including select financials, health-care companies and technology leaders, including some of the Magnificent Seven names. Cyclical sectors such as industrials and materials could also benefit from stronger commodity demand, she said. “While surface-level index movements mask extreme rotations and stock dispersion, U.S. equity resilience in the face of war and oil shocks is largely unprecedented in the past 80 years,” Shalett said. Hedging with options For some portfolio managers, the focus is shifting toward hedging strategies as geopolitical risks increase. “Energy can and should be a part of people’s portfolios from a diversification and real return potential side,” said John Luke Tyner, portfolio manager and head of fixed income at Aptus Capital Advisors. At the same time, Tyner said long-term Treasurys may no longer provide the same downside protection for portfolios during market selloffs, prompting investors to look for alternative hedges. “Using options to protect against the real bad scenario happening, as well as to create some income for the portfolio to lower volatility, makes a lot of sense in this current environment,” he said. — CNBC’s Sean Conlon contributed reporting.
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