The index of energy producers, such as NextEra Energy Inc. and Southern Co., rose more than 6% since the beginning of September 2, when the S&P 500 was at its peak, outpacing the wider market.
The superiority shows stock buyers flocking to the sector in search of dividend income and lower volatility, taking a slightly cautious stance ahead of the presidential election and amid an uncertain path to the economy and global pandemic. But by choosing stocks instead of fixed-income products, hedge investors are protected from losing profits if stocks continue to reach record highs again.
“More cautious investors also want to see some positive returns, and unfortunately to do so in this environment, they have to take some risk for their equity,” said Brian Walsh, Jr., senior financial adviser at Walsh & Nicholson Financial Group. . “And the best way to do that is through utilities.
The new love of utilities is a reversal from earlier this year, when the sector gave up its role in a safer corner of the market, hurt by speculation that the industry could cut dividends to deal with the pandemic. Technical stocks took this position, pushing the indices to records.
The fact that utilities are superior “underscores the protective sentiment that has become more uncertain about the virus and the incentives,” said Nela Richardson, director and investment strategist at Edward Jones. “Utilities need to perform well in this low-interest environment.”
With interest rates at historically low levels, utilities are attractive to investors looking for a reliable income. Yields on 10-year government securities are well below 1%, while the S&P 500 Utilities index is set to pay a dividend of around 3.2% this year.
“This utility trade is almost the equivalent of money trading for people where they need a return,” said John Ham, an associate adviser at the New England Investment and Retirement Group. “This is becoming a substitute for income for many people.”
Source: Bloomberg Pro Terminal
Chart: Used with permission from Bloomberg Finance L.P.
Junior Trader Mert Mustafa