Utility Stocks Correct 5% from Their Recent High—What’s Next?
US utilities weak
The week ended September 22 was a shaky one for US utility stocks after the Federal Reserve seemed firm on another quarter-point rate hike by December 2017. The Fed’s two-day policy meeting, which kept the rates unchanged last week, demonstrated that 11 of the 16 officials expect another quarter-point rise in its benchmark interest rates by the end of the year. The Utilities Select Sector SPDR ETF (XLU) fell 2.8% and the SPDR S&P 500 ETF (SPX-INDEX) (SPY) rose marginally during the week.
The optimism over another rate hike boosted Treasury yields during the same period. The ten-year Treasury yield rose from 2.20% to 2.25% last week.
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Treasury yields and utility stocks typically trade inversely to each other. Last week’s rise in Treasury yields resulted in a sharp fall in utilities, generally considered as bond substitutes.
Gainers and losers
The top four utility stocks by market capitalization were NextEra Energy (NEE), Duke Energy (DUK), Southern Company (SO), and Dominion Energy (D). These utilities were significantly weakened during the week ended September 22.
Regulated utility giants Southern Company and Duke Energy fell ~3.5%, and Dominion Energy and NextEra Energy lost 3.2% and 2.5%, respectively, during the week.