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Where US Utilities Might Go from Current Levels

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Nov. 20 2020, Updated 5:31 p.m. ET

Utilities are weak

US utility stocks fell for the sixth consecutive trading session on July 5, 2017. Weakness in utilities became evident when the Utilities Select Sector SPDR (XLU) corrected more than 6% after hitting its recent high of $54.63 last month. The SPDR S&P 500 (SPX-INDEX) (SPY) has been strong during this period.

The correction in utilities might be due to the sharp rise in US Treasury yields. Since June 26, 2017, the ten-year US Treasury yield rose from 2.2% to 2.3%. Treasury yields and utilities generally move inversely to each other. In the past year, broader markets rose 16% while utilities, at large, fell nearly 2%.

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Florida-based NextEra Energy (NEE), the biggest utility in the sector, rose more than 7%, while Duke Energy (DUK), the largest regulated utility, fell 3% in the past year. Southern Company (SO), the third-largest utility by market capitalization in the country, fell 12% during the same period. Together, these three utilities account for ~25% of XLU.

Southern Company stock has trended downwards for the last few months. To learn more, read Power Plant Woes Continue to Bite Southern Company.

Utility stocks to recover soon?

Indeed, the correction in utility stocks was long overdue and we might continue to see more downtrend. However, it should also be noted that there’s a lower possibility of a bigger correction in utilities due to their intrinsic strength. They seem financially stable and might continue to offer healthy dividends. It’s the best yielding sector among broader equities. In fact, due to utility stocks’ healthy growth potential, we even might see fresh buying at the current levels.

Utility stocks generally move opposite to interest rates. However, even after four rate hikes in the last two years, utility stocks rose nearly 25% and outperformed broader markets by a huge margin.

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