Energy Sector Helps Sustain Wall Street's Rally

U.S. equity markets had a change of heart on Wednesday as they shook off steep losses from the prior session.

The Dow Jones Industrial Average was 227 points higher, or 1.41% to 16379. The S&P 500 jumped 31 points, or 1.66% to 1921, while the Nasdaq Composite added 88 points, or 1.96% to 4615.

Energy was by far the biggest outperformer for the market, while health care and technology also gained steady ground.

Today’s Markets

Take two aspirin and sleep on it: A remedy that seemed to work for Wall Street on Thursday after a swift and steep plunge in the final hours of trading on Wednesday that nearly pushed the major averages into correction territory.

The rally was the biggest in five weeks, a refreshing sign for Wall Street’s bulls, as NYSE composite volume ran about 34% above the one-month average.

After a shaky start to the session, Wall Street moved decidedly higher as energy shares staged a comeback. The energy sector was by far the biggest gainer, leaping more than 4% in recent action with ExxonMobil (NYSE:XOM) and Chevron (NYSE:CVX) leading the Dow’s gainers.

Global crude oil prices rebounded after Brent ended the prior session at its lowest level in 12 years. But on Thursday, West Texas Intermediate crude rallied 2.36% to $31.20 a barrel, while Brent, the international benchmark, gained 2.38% to $31.03 a barrel. No particular news sent oil prices higher.

Deutsche Bank’s chief international economist, Torsten Slok, said in a note that part of the rally in energy is a growing sentiment of “buy when the news is the worst.”

“Oil prices have already fallen from $100 to $30 and we know that oil prices cannot fall another $70. In that sense, we have the worst behind us in terms of declines in oil prices,” he explained.

He continued by explaining that even the economic impact from low oil prices is limited from here. The example he used was the share of capex which is energy fell from 10% to 5%, and can only go another 5% lower before hitting zero, which would be unprecedented.

“The bottom line is that we are likely to see downward pressure on GDP from the energy sector over the coming quarter or two, but we now have the worst behind us in terms of the negative impact of falling oil prices on the economy,” Slok said.

Quarterly earnings – especially for energy companies – are also a big slice of the overall picture for the market, Kevin Kelly, managing partner of Recon Capital said.

“We’re still waiting for energy companies to release their earnings and talk about how low oil will impact their results,” he said. “They’ll say where they can work with oil, whether that’s at $20, $25, $30 a barrel. Catching a bid right now is helping give a little bit of confidence back to the market.”

Investors on Thursday also cheered better-than-expected quarterly results from JPMorgan Chase (NYSE:JPM). The nation’s biggest ban k by assets was the first of the five big banks to unwrap their fourth-quarter performance. JPM revealed adjusted earnings per share of $1.32, handily beating expectations for profits per share of $1.25. Revenue of $22.9 billion was in line with analysts’ estimates for $22.89 billion.

Traders rewarded the stock, sending it up 2.5%, making it the third-biggest gainer on the Dow Industrials. Citigroup (NYSE:C) and Wells Fargo (NYSE:WFC) will release their results ahead of the opening bell Friday.

Kelly explained a small part of the reason the markets have experienced heightened volatility so far this year is in part due to companies in blackout periods ahead of their quarterly earnings results.

“I think we’re going to get guidance and conviction in the market from companies once they start reporting earnings,” he said. “They lend to 25% of overall trading volumes because they often purchase their own stock. We’re not getting those underlying bids right now. It’s all trading on macro news right now.”

He suspected the slowing China growth story, which weighs on the capital markets, along with pressured commodity prices are likely to be persisting themes in 2016.

“The International Monetary Fund said they expect sub 2% global growth this year. But the U.S.  could be strong. In the past, it was the U.S. that used to be the straw that stirred the global economy. But now, it’s the drink that’s stirring us,” Kelly said.