Displaying items by tag: utilities
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.
Stocks have been doing well this year, but we are willing to bet that the sectors that have been performing best over the last 12 months are not the ones you expect. With all the fears over rate hikes in the last year, it is hard to imagine that utilities and REITs are both up nearly 20% in the last 12 months, far ahead of the S&P 500’s 4.08%. Even tech is only up about 5%.
FINSUM: The most exciting thing about this performance is that the runway for income investments looks like quite strong—the Fed is unlikely to hike, which means there seems to be little rate risk.
This is quite a market storm investors are facing. The rolling bear market has blossomed into a widespread rout with few hopeful signs. One of the scary parts for investors is that the old places to ride out such market storms are not collapsing. In other words, even safe havens aren’t safe. Consumer staples, healthcare, and utilities, all typically bastions of protection during downturns, fell to being this week. Utilities, for instance, fell over 3%, their worst tumble since the 2016 election day.
FINSUM: One analyst sees a silver lining in this. Their argument is that since this is becoming a broad pullback (instead of a rolling bear), it may indicate the worst is near to being over.
One of the challenges that all advisors are dealing with at the moment is how to handle rising rates and their affect on portfolios. There are good options out there for handling the challenge, like rate hedge ETFs, but within the efforts to defend against losses, there have a been a few hard-to-predict moves. One big surprise has been the performance of utilities stocks. Utilities generally lose when rates rise as their yields look relatively less attractive. However, utilities are outperforming the market, with a flat performance this month through Monday, and a 6% gain in the last three months. Explaining the gains, one fund manager says “'In a market like this, in a dramatic sell-off, the rotational effects will be higher than the interest rate effect”.
FINSUM: We sort of understand the safe haven status, but how does a rate-sensitive sector become a safe haven from rate-driven losses? Nonetheless, utilities stocks are doing well.