This Sector Will Be Crushed If Rates Rise

Will they, or won’t they?

This question, referring to the FOMC’s decision about whether to raise key interest rates, is all over the news. At 2:00 PM EST today, we’ll finally have our answer. And, if this month is anything like last month, we’ll likely see a big move in the market regardless of the outcome.

For reasons I’ve discussed before, I do not expect the Fed to raise rates just yet. And even if they do, it probably won’t be anything too drastic and be a one and done kind of deal. That’s something Janet Yellen has made very clear; that the Fed doesn’t intend to raise rates dramatically.

However, if I’m wrong, and the Fed decides to raise rates, there’s one sector that will be hit especially hard. That’s the energy sector.

Now, this shouldn’t come as a huge shock, because energy stocks as a whole are already pretty beaten down. In the past three months, the sector has plunged 19%, while the S&P 500 has fallen 5%. The primary culprit is the strengthening dollar. Commodities like oil, copper and cotton are priced in U.S. dollars; when the dollar rises relative to other currencies, the price of commodities fall.

Case in point: The average cost of regular gasoline at the pump has fallen 32% in the past year. Over the same period, the U.S. dollar has gained 13% against the Euro, 5% against the Pound, 17% against the Canadian dollar and 11% against the Yen.

While this is great news for American consumers, who are saving at the pump, this is terrible news for energy companies. This quarter, the energy sector’s earnings are expected plunge 63% over a year ago, according to FactSet.

Now, what does the Fed’s rate decision have to do with all of this? Well, if the Fed does raise rates, this will actually strengthen the dollar even more against international currencies. This, in turn, will put additional pressure on commodities prices.

Well, if you get right down to it, energy companies still have their work cut out for them even if rates remain the same. That’s because oil prices move in seasonal patterns: They rise in the spring and decline in the fall. I will say that this talk about oil hitting $20 per barrel may be an over exaggeration, but it will likely fall from current levels. And, when you throw in lingering inventory problems in the U.S., the outlook for the energy sector isn’t that bright.

However, what is bright is the silver lining to the energy sector’s storm clouds. Cheap oil and gas prices are a boon for a number of industries, and in my Blue Chip Growth newsletter I’m zeroing in on these opportunities. For example, we’ve held Southwest Airlines (LUV) since May 2013. Thanks in part to cheap fuel costs, the stock has surged 196% since we originally added it.

So, when it comes to falling oil prices, there are buying opportunities out there; you just need to know where to look.


Louis Navellier

Louis Navellier

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