Displaying items by tag: utilities
Utilities just hit a new high. So what else is new. Utility stocks have been surging this year alongside falling rates, and they are not the only ones. Consumer staples, consumer discretionary and even tech have been rising strongly. Not only do the dividends look appealing, but the stable earnings profile is attractive given the threat of a downturn. What is most impressive is that utilities have held up even though value has been surging. According to Goldman Sachs “With the Fed cutting rates again this week and the 10-year yield at 1.78% [now 1.71%], utilities continue to perform well, despite NT headwinds as broader momentum trades reversed slightly”.
FINSUM: As long as there is downward pressure on rates, we suspect dividend stocks will be strong. But it wouldn’t take much to reverse that.
There are a handful of safe haven stock sectors that investors tend to rely on during market downturns. Healthcare, utilities, and REITs come to mind. Lately, some have been saying bank shares may also prove a good defense. However, investors should be very wary of two of those just mentioned: healthcare and banks. While on the surface healthcare stocks look very good for a recession—it is not as if people stop getting sick—the reality is that there has never been more regulatory pressure on the sector (from both sides of the aisle), which means it is far from safe. Additionally, the idea that banks have become safe, utility-like dividend machines is flawed, as bank earnings are very exposed to the economic cycle, and thus will likely see big moves in both price and yield.
FINSUM: We agree with this assessment entirely. Healthcare is more vulnerable than it has been in memory and banks are a long way from being dependable utilities (excellent PR job by Wall Street though!).
Low volatility stocks have been the hero of the volatility over the last year. In the past 12 months, the S&P 500 has returned 3.2%. That compares to a whopping 14% plus for low volatility stocks, such as in the S&P 500 low-vol index. By definition, low volatility stocks are boring (think utilities, insurance, and REITs) and have stable earnings. That works well for defending against market swings, but the protection means that valuations are WAY above their long-term average (three standard deviations above). That said, falling rates are very helpful to this class of stocks, so there is wind at their backs.
FINSUM: Despite quite high valuations, we think low vol stocks will continue to do well so long as the trade war continues to plague markets.
Dividend stocks have been an interesting case over the last few quarters. In the fourth quarter, when interest rates looked to be headed higher, they actually outperformed the market (counterintuitively). This year, as rates look to be headed lower, they have performed quite well (up 16%), but still lagged a bit behind the S&P 500. The question is where they go from here, and all signs point to higher given the prevailing rates environment and general anxiety. The trick is buying the right ones, as financials and healthcare offer better value than more traditional areas like utilities, real estate, and consumer staples.
FINSUM: We think these are good sector selections as they have not seen as much price inflation as the more common dividend choices. Healthcare seems particularly interesting given that it is quite recession-resistant.
One of the interesting aspects of the market this year is that the sectors that are doing best are not the ones an investor would naturally expect. For instance, the sector which is blowing away the S&P 500 is utilities. The stocks have been doing so well, they are showing up in momentum oriented funds, which is a rarity. The sector is known for its solidity and stable returns, but right now utilities are hot. Over the last twelve months, utilities have returned 21.2% versus the S&P 500’s 7.3%.
FINSUM: You don’t usually think of utilities getting hot, but because rates are falling at the same time as real estate weakening, utilities are taking a lot of capital that is usually split with REITs.