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Utilities stocks have dropped into unusual territory, after being “decimated” by rising interest rates, according to Bespoke Investment Group.
On Monday, the S&P 500’s utility sector closed “3.2 standard deviations below its 50-day moving average which is the most oversold reading for the sector since February 2021,” Bespoke said in a note emailed Tuesday. “It isn’t often that you see the sector get this oversold.”
BESPOKE INVESTMENT GROUP NOTE EMAILED OCT. 3, 2023
In the past five trading days through Monday, the S&P 500’s utility sector has plunged 11.2% as Treasury yields have climbed, while the broader S&P 500 index slipped just 1.1% over the same period, according to FactSet data.
“In the short-term, the sector’s 11% decline is the steepest five-day decline since last June,” Bespoke said. “But the difference between these two periods is that back in June 2022, the S&P 500 was down over 10% during that same five-day span while it’s only down 1% in the current five-day span.”
Bespoke found that “after adjusting for the S&P 500’s performance, the utility sector is underperforming the S&P 500 by the widest margin over a five-day period since October 2022.”
As for rising rates, the yield on the 10-year Treasury note
BX:TMUBMUSD10Y
jumped 11.9 basis points on Tuesday to 4.801%, after fresh economic data showed a rise in job openings in a growing U.S. economy. That’s highest level since August 2007 based on 3 p.m. Eastern Time yields, according to Dow Jones Market Data.
Two-year Treasury yields
BX:TMUBMUSD02Y,
which have been trading above 10-year rates, climbed 3.8 basis points on Tuesday to 5.148%.
Investors tend to turn to utilities as a defensive area of the stock market in an economic downturn. And while the sector is known for its dividend-paying stocks, higher bond yields have been attracting investors in the wake of the Federal Reserve’s rate hiking campaign.
‘Negative momentum remains strong’
Fairlead Strategies founder Katie Stockton warned in a note in early September that the Utilities Select Sector SPDR Fund
XLU,
an exchange-traded fund that tracks utilities stocks in the S&P 500, had tumbled into “a decisive breakdown.”
“There are short-term signs of downside exhaustion, but negative momentum remains strong” for the ETF, Fairlead Strategies said in a note Tuesday.
After tumbling 4.7% on Monday in its biggest daily drop since 2020, the S&P 500 utility sector index
XX:SP500.55
closed 1.2% higher on Tuesday, but still well below its 50-day moving average.
FACTSET DATA ON OCT 3, 2023
Utilities stocks are by far the S&P 500’s worst-performing sector so far this year with a plunge of 19.5% through Tuesday, according to FactSet data.
Investors have pulled almost $453 million from the Utilities Select Sector SPDR Fund this year through Monday, including $377 million over the past week. FactSet data show.
The S&P 500 index, by contrast, still has gains of 10.2% in 2023 through Tuesday, as the index has been propped up by a small group of so-called Big Tech companies that have soared this year. But the index shed gains in both September and August amid worries over the recent surge in Treasury yields.
The U.S. stock market finished sharply lower on Tuesday as rates continued to move higher, with the Dow Jones Industrial Average
DJIA
falling 1.3%, the S&P 500
SPX
dropping 1.4% and the Nasdaq Composite
COMP
sliding 1.9%, FactSet data show.
