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Energy and financial stocks: Value and Fed play
Energy and financial stocks: Value and Fed play © iStock

Energy and financial stocks: Value and Fed play

Energy stocks have been beaten down by the plunge of oil prices over the past 18 months, making them an attractive bargain, says Nicholas Colas, chief market strategist for Convergex brokerage firm. Meanwhile, the Federal Reserve will almost certainly raise interest rates next year, making financial stocks attractive, he maintains.

As for energy stocks, "commodity prices seem to have stabilized," Colas says. His clients "think the selling is overdone." The S&P 500 Energy index has returned a woeful -20.7% over 1 year through early November, compared with a positive, albeit meager, return of 1.9% for the entire S&P 500.

"U.S. oil production is declining, and demand is still strong in the U.S.," Colas says. In addition, the world economy continues to grow and should recover from its recent slowdown, implying stronger future demand for oil, he says. "Tie that all together and you have a good value story."

A boost in rates in 2016 would allow banks to earn more income on their loans and bond holdings. Meanwhile, banks are generally able to lag behind the Fed's pace in raising rates for their depositors, so banks' net interest margin should increase, Colas says.

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