In late 2015 and early 2016, as oil crashed, a curious divergence emerged: as crude was dropping, junk bonds crashed with a far greater beta to the drop in the underlying commodity than equities, which remained persistently sticky, stubbornly refusing to drop to a “fair value” implied by oil. The same phenomenon was even more obvious on the way up, as once oil had found a “bottom” energy stocks surged, at times approaching record forward P/E multiples. We showed this epic divergence one years ago in “There Is No Word To Describe This” – The Energy Forward P/E Multiple Is Now Off The Charts.”
There was a simple explanation: markets assumed that last year’s oil crash was an outlier event, and as a result projected that oil would quickly return to its pre-crash levels.
It tried, and despite OPEC throwing everything it had ad it, it failed.
Which brings us to an interest observation made by Goldman overnight: in 2017, the relationship noted above has been flipped, and this time around it is HY Energy that is resisting lower crude, even as stocks are sliding far more than the recent drop in oil would suggest. Here’s Goldman:
This post was published at Zero Hedge on May 12, 2017.