The five-month long rally of Wall Street suffered a severe setback last month. Despite the fact that the market has recovered to some extent so far in October, volatility persists. It seems that market participants are also clueless about the direction in which the market will go even in the near term.
Meanwhile, as investors are taking precautionary measures to safeguard their portfolios, the Utilities sector emerged as the best performer past month superseding the technology, consumer discretionary and communication services sectors, the best three performers year to date.
Utilities are Immune to the Vagaries of Economic Cycle
The Utilities sector is mature and fundamentally strong as demand for such services is generally immune to the vagaries of the economic cycle. It's because these companies provide basic services like electricity, gas and water, 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. Moreover, the sector is known for stability and visibility of its earnings and cash flows. Stable earnings enable utilities to pay out consistent dividends, making them more attractive to income-oriented investors.
Utility companies enjoy a reputation for safety 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 have been plaguing the other industries of late.
In the past month, the Utilities Select Sector (XLU), one of the 11 broad sectors of the S&P 500 Index, rallied 11.4%, surpassing the technology, consumer discretionary and communication services gains of 6%, 7% and 5.5%, respectively.
Volatility Likely to Remain in Near Future
First, despite intense negotiation between the U.S. Treasury Secretary Steven Mnuchin and the House Speaker Nancy Pelosi, the U.S. Congress has failed to reach a solution regarding the size and scope of a fresh fiscal stimulus. Uncertainty is growing over the finalization of a deal before the U.S. presidential election on Nov 3.
Second, the possibility that a vaccine or a proper line of treatment for COVID-19 appearing this year seems like a remote possibility. This month the FDA has paused late-stage clinical trials of two drugs for the potential treatment of conronavirus on safety concerns. This week, a patient in Brazil enrolled for the clinical trials of the Oxford University initiated COVID-19 vaccine died.
Third, several states and regions in the United States and major Eurozone countries have recently witnessed another spike in COVID-19 infections as these economies are trying to return to normalcy. The United States is facing the third spike in COVID-19 infections. In Europe, the government of France has declared a public health state of emergency and the U.K. government is mulling over a second national lockdown. More lockdowns will significantly affect global trade, travel and tourism.
Fourth, the U.S. presidential election is less than two weeks away. Historically, stock markets have remained volatile during the month before the election. Market participants generally choose to hold cash instead of investing in risky assets like equities while assessing the economic and financial consequences of the election result.
Stocks to Watch
Utilities are a safe bet during market turmoil as they are relatively stable due to the essential nature of the products they offer. Several utility stocks have provided double-digit returns in the past month. Notable among them are MYR Group (NASDAQ:MYRG) Inc. MYRG, PNM Resources Inc. PNM, Exelon Corp. EXC, Chesapeake Utilities (NYSE:CPK) Corp. CPK, Eversource Energy (NYSE:ES) ES and Pinnacle West Capital Corp. PNW. All these stocks rallied more than 15% in the past month.
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