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Rising inflation and a robust labor market have sparked worries about the Federal Reserve's future approach to interest rate cuts. This has been denting consumer sentiment this year, with major indexes that started retreating in late December, extending their losses into the new year.
Given this uncertain environment, utility funds like Fidelity Select Utilities FSUTX, American Century Utilities Inv BULIX and Franklin Utilities Fund FKUTX are safe bets.
Consumer Sentiment Declines in January
The University of Michigan’s Consumer Sentiment Index showed a preliminary reading of 73.2 in January, down from December’s 74 and below the consensus estimate of 73.8. Additionally, one-year inflation expectations rose from 2.8% in December to 3.3% in January, while long-term expectations climbed to 3.3% from 3% the previous month.
The dip in sentiment reflects growing consumer concern about the economy’s outlook as inflation has steadily increased over the last two months. Uncertainty about when inflation might stabilize near the Federal Reserve’s 2% goal continues to dampen sentiment.
After a significant decline in the third quarter, inflation began climbing again. The Consumer Price Index (CPI) grew by 0.3% in November, the most significant monthly gain since April 2024, while core CPI, excluding food and energy, rose 0.3% month over month and 3.3% year over year.
The Federal Reserve has reduced interest rates by 100 basis points over its last three meetings. However, higher inflation could prompt the Fed to slow its pace of cuts, with only two rate reductions now anticipated in 2025. Markets currently predict a 97.3% likelihood that the Federal Reserve will keep rates unchanged during its January policy meeting, as indicated by the CME FedWatch tool. Elevated rates may prolong market volatility and weigh further on consumer sentiment.
3 Best Choices
We've identified three utility mutual funds that have demonstrated impressive annualized returns over 3-year and 5-year periods. These funds also hold a Zacks Mutual Fund Rank of #1 (Strong Buy), require an initial investment of no more than $5,000 and have a low expense ratio.
The question here is: why should investors consider mutual funds? Reduced transaction costs and diversification of portfolio without several commission charges that are associated with stock purchases are primarily why one should be parking money in mutual funds (read more: Mutual Funds: Advantages, Disadvantages, and How They Make Investors Money).
Fidelity Select Utilities fund seeks capital appreciation. FSUTX normally invests at least 80% of assets in common stocks of companies principally engaged in utilities and companies deriving the majority of their revenues from utility operations.