Buying so-called momentum stocks means betting that past winners will continue to outperform in the future. People who like the idea may find themselves with some surprising investments: shares of utilities.
Momentum investors have a range of tools. They can rank stocks according to their short-term performance, selecting the group that is rising the fastest, or pick those whose short-term gains are the highest relative to their long-term performance. But they all come up with a set, or basket, of stocks that are doing particularly well.
According to Maxwell Grinacoff from Macro Risk Advisors, utilities have had the closest correlation with the firm’s momentum basket lately, meaning they tend to move more closely in tandem with the market’s best performers than any other sector. That is another way of saying that more utility stocks are showing up in the momentum basket now.
This is a rare phenomenon. Utilities are usually considered a safe choice with stable returns, unlike the tech companies that have been driving most of the stock market’s growth over the past decade. But as the market pulled back significantly last year, even steady gains can become top-notch performance.
While the broad market was hit fairly hard during last year’s drawback, utility stocks held up well. Including dividends, the Utilities Select Sector SPDR ETF (XLU) had a total return of 21.2% for the 12 months ended on Thursday, according to Bloomberg data. By way of contrast, the SPDR S&P 500 ETF (SPY) returned only 7.3%, including dividends.
That strength is likely to continue, wrote Grinacoff on Wednesday, because the Federal Reserve reiterated its dovish monetary-policy stance following its latest meeting, saying that it isn’t likely to increase interest rates until at least the end of the year.
Lower rates for longer would be good for bond-like stocks such as utilities. Typically, lower bond yields indicate a weakening of economic growth, which makes defensive sectors with stable dividend income—such as utilities—more attractive than cyclical ones as investors seek protection against losses.
It could be a good time to own some utility stocks.
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