Earlier this year we witnessed a sharp uptick in a number of the energy related stocks in our Coverage Universe from the lows experienced after the oil price shock which began this past fall. The spike began in early March as oil prices strengthened and investors bid up depressed energy shares, particularly in some of the quality names we cover(ed). As the adage states however, even a dead cat will bounce if you drop it from sufficient heights. We worried that oil was the bouncing cat.

By May, a number of producers and oil service stocks had more than doubled since dropping to year lows in January of this year. While some of the gains were deserved as the price declines are typically over done when panic sets in, in our Focus Buy Quarterly Commentary at the time, we saw risk in the segment as capital spending has ground to a halt in some areas. At that time crude was well above its lows but still remained 35-40% lower than the levels we saw at this time last year and by most reports, the world remained rather awash in oil.

Given this widely held view, it was unclear as to whether a continued uptick in oil is sustainable. What we did and continue to know is that capital spending will be significantly lower in the energy segment for at least 12-months time. As such, recommended not to add to our exposure in this group and took the opportunity to cut some names following the recent uptick as almost all energy related companies continue to face significantly lower year-over year results for the next 12-18 months minimum. 

Fast forward to today as both WTI and Brent Oil are hitting new-year lows, we continue to advise clients to avoid all but one or two energy names in our Small-Cap Coverage Universe near term. Poor year-over-year cash flow comparisons will continue for at least the next 3-4 quarters and with share prices hitting new-year lows, we expect the sector to be a favourite in this year’s late November and early December tax loss selling.

As such, we do not believe now is the time to begin buying energy related stocks. While our analysts will re-evaluate the landscape at the time, we expect to see some value in this segment near the end of 2015. This does not guarantee we will be buyers however, as we look for both value or reasonable prices and growth. The latter may not present itself again for quite some time.

Broader Markets

Broader North American markets remain fixated on the U.S. Federal Reserve.

Canada’s main stock index fell on Friday in a broad retreat led by heavyweight energy and financial stocks as oil prices recorded their sixth straight weekly loss and North American jobs data highlighted Canada’s relatively flaccid economy.

Canadian employment data showed a small gain in June, but a loss of full-time positions, while U.S. numbers were close enough to forecast to stoke bets the Fed will raise interest rates, perhaps as early as September.

In the U.S., investors have been negatively reacting to positive economic news, as it increases the likelihood of a rate hike in September.

Historically, investors have a wide variety of investment options. Many believe the low rate environment has made stocks the only game in town. Raising rates puts a crimp in this.

The theory is that when comparing the average dividend yield on a blue-chip stock to the interest rate on a certificate of deposit (CD) or the yield on a U.S. Treasury bond (T-bonds), investors will often choose the option that provides the highest rate of return – on a risk adjusted basis. With rate held to zero, stocks have been the preferred vehicle. The current federal funds rate tends to determine how investors will invest their money, as the returns on both CDs and T-bonds are affected by this rate.

Rising or falling interest rates also affects consumer and business psychology. When interest rates are rising, both businesses and consumers will cut back on spending. This can cause earnings to fall and stock prices to drop. On the other hand, when interest rates have fallen significantly, consumers and businesses will increase spending, causing stock prices to rise.

As we get closer to September, the data reports will be more and more important, and July’s U.S. job data was consistent with the trend the Fed wants to see before they decide to pull the trigger on the first rate hike. Many believe the market is now putting a greater probability on the Fed raising rates in September. However, today’s number was spot on consensus, and it’s not really spectacular enough to make a September rate hike a foregone conclusion.

All eyes will be on August data, and unless there is a surprise to the downside, a September hike seems increasingly probable.