Utilities Return as the All-Weather Trade for Cautious Investors
(Bloomberg) -- Move over, tech. Utilities are reclaiming their all-weather defensive role in the stock market.
An index of power producers such as NextEra Energy Inc. and Southern Co. is up more than 6% since the Sept. 2 top in the S&P 500, outpacing the broader market by about 10 percentage points. The next-best group has advanced 2% and everything else is in the red.
The outperformance shows stock buyers flocking to the sector in search of dividend income and lower volatility, taking a somewhat cautious stance ahead of the presidential election and amid an uncertain path for the economy and global pandemic. But in opting for stocks instead of fixed-income products, defensive investors are guarding against losing out on gains if equities go on another run to record highs.
“More cautious investors, they still want to see some positive return and unfortunately, in order to do that in this environment, you have to take some sort of equity risk,” said Brian Walsh, Jr., senior financial advisor at Walsh & Nicholson Financial Group. “And the best way to do that -- to take on the equity risk but also protect on the downside a bit -- is through the utilities.”
The new love for utilities is a turnaround from earlier this year, when the sector had relinquished its role as a safer corner of the market, hurt by speculation that the industry might slash dividends to cope with the pandemic. Tech shares took over that position, pushing benchmark indexes to records.
Since the S&P 500’s all-time high, however, tech stocks have lost 6%, making them one of the worst-performing sectors during that stretch.
Equities have struggled to reclaim their high amid setbacks in lawmakers’ efforts to agree to a new package of fiscal aid as well as rising Covid-19 case counts around the country. Meanwhile, the economic rebound is losing steam, with several indicators -- including jobless claims and restaurant bookings -- either worsening or showing no improvements.
The fact that utilities are outperforming, “underscores the defensive sentiment that has taken hold with more uncertainty around the virus and around stimulus,” said Nela Richardson, principal and investment strategist at Edward Jones. “Utilities should be performing well in this low interest rate environment.”
In fact, many high-dividend stocks are doing well. The S&P 500 Dividend Aristocrats Index -- which invests in companies with consistently increasing cash payouts -- is on pace to beat the broader market for the second straight month.
With interest rates at historically low levels, utilities are appealing to investors looking for reliable income. Yields on 10-year Treasuries are well below 1%, while the S&P 500 Utilities Index is on track to pay a dividend yield of about 3.2% this year.
“That utility trade is almost that cash equivalent trade for people where they need yield,” said John Ham, an associate adviser at New England Investment and Retirement Group. “That’s becoming an income replacement for a lot of people.”
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