Fra Barrons.

Energy Stocks Could Be a Surprise Beneficiary of an Inverted Yield Curve

The bond market’s warning signal to investors this week caused stocks to plunge, and is raising new concerns about a looming recession. The yield on ten-year Treasury debt fell below the yield on two-year bonds on Wednesday for the first time in over a decade.

While that’s a sign investors see economic trouble ahead, it doesn’t mean stocks always get hurt. In fact, all five times this has happened since 1978, the broader market has risen over the next year.

And one sector in particular has tended to perform well: energy.

After years of underperformance, energy stocks could use any help they can get. Energy, once a double-digit contributor to the S&P 500, now makes up less than 5% of the index’s market cap.


Bank of America Merrill Lynch strategist Mary Ann Bartels wrote in a note this week that the energy sector has outperformed the S&P 500 80% of the time the yield curve inverts, beating the index by an average of 7.3%.

“The energy sector has also underperformed the S&P 500 by over 90 percentage points in the last five years which could provide some cushion relative to any potential weakness in the broader equity markets,” Bartels wrote.

For ETF investors, Bartels thinks it makes sense to use the Energy Select Sector SPDR ETF (XLE) to play the sector, because of its relatively low expenses and history of tracking closely to the net asset value of its constituent stocks. Its top two holdings are ExxonMobil (XOM) and Chevron (CVX).

There are important caveats, however: Tariffs could hurt energy demand, as could a recession, of course.