Utilities are weak
US utilities have been trading weak for the last few months. Along with rising interest rates, record high valuations have been mainly behind utilities’ recent fall. The Utilities Select Sector SPDR ETF (XLU), which tracks the S&P 500 Utilities Index, has corrected almost 15% since mid-December 2017 when the Fed delivered the rate hike. XLU hit its 52-week low of $47.37 on February 6, 2018.
Recently, there has been a flurry of S&P 500 Utilities stocks hitting new yearly lows. Let’s take a look whether these utilities offer an opportunity or if there’s more weakness coming your way.
What weighed on utilities?
Duke Energy (DUK), the second-largest utility by market capitalization, was very weak recently. Duke Energy has lost 4% in the past year and underperformed broader utilities. Southern Company (SO) largely trended downwards last year. Southern Company’s power plant woes weighed on its market performance in 2017. Southern Company has lost more than 11% in the past year. Currently, Southern Company is trading at a 52-week low.
Duke Energy and Southern Company are the largest regulated utilities in the country. Tax reforms introduced this year are expected to be the least beneficial for utilities compared to other sectors.
Rising Treasury yields also weighed on utilities. The ten-year Treasury yield rose 2.9% in early February—the highest level in almost five years. Treasury yields and utility stocks usually move inversely to each other.