In This Article:
The Utilities sector is set to become the best performer of the S&P 500 Index in the third quarter of 2019. Although Wall Street is recovering impressively in 2019 after a disastrous 2018, several headwinds persist.
Utilities are a safe bet during times of market turmoil, as they are relatively stable due to the essential nature of the products they offer. Consequently, it will be prudent to invest in utility stocks with a favorable Zacks Rank to secure gains in this erratic market.
Impressive Performance by Utilities Sector in 2019
The utilities sector was the best performer of the 11 broad sectors within the benchmark S&P 500 Index in 2018 as a result of the Wall Street mayhem. Utilities gained 4.9% compared with a 6.2% loss of the S&P 500 Index. However, Wall Street recovered impressively in the beginning of 2019, notching the best-performing first quarter in three decades.
Meanwhile, market volatility started spoiling the Wall Street party intermittently in the second quarter of 2019. There after, uncertainty over the U.S.-China trade deal, global economic slowdown, inversion of government bond yield curve in August, and geopolitical disturbances like Brexit cropped up as the primary reasons for market fluctuation. And now, the initiation of an impeachment proceeding against President Donald Trump could be an added concern.
So far in the third quarter of 2019, S&P 500’s Utilities Select Sector SPDR (XLU) has gained 9.5% while the benchmark index itself rose just 2.2%. During the past six months, the utilities sector once again advanced most with a gain of 10.1% while the broad-market index advanced a little less than 5.7%.
Year to date, utilities are the third-best performer, surging 22.7%, after the technology sector (30.3%) and real estate (27.6%). Notably, the S&P 500 Index has climbed 18.8% so far in 2019.
Utilities Immune to Vagaries of Economic Cycle
The Utilities sector is mature and fundamentally strong as demand for such services is generally immune to the changes in the economic cycle. It's because these companies provide basic services like electricity, gas, water and telecommunications, which can never go out of demand.
Consequently, adding stocks from the utility basket usually lends more stability to a portfolio in an uncertain market condition. Moreover, the sector is known for stability and visibility of its earnings and cash flows. Stable earnings enable utilities to pay out consistent dividends that make them more attractive to income-oriented investors.
Utility companies enjoy a reputation for being safe given the regulated nature of their business, which lend their revenues a high level of certainty. These companies also benefit from the domestic orientation of their business, which shields them from foreign currency translation issues that are lately plaguing the other industries.
Our Top Picks
Stock markets are likely to remain volatile in near future due to trade concerns, global growth woes and political issues. Consequently, investment in defensive sectors such as utilities should be fruitful.
We have narrowed down our search to five utility stocks with a Zacks Rank #1 (Strong Buy) and strong growth potential. You can see the complete list of today’s Zacks #1 Rank stocks here.
The chart below shows price performance of our five picks in the past month.