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Macro View: Utilities Sector Presents Attractive Opportunity

On August 14, the utilities sector broke out from a one-month-long plateau and into an all time high. This caught my eye because on August 14, the yield curve inverted (see my last post for explanation). After inversions, the utilities sector usually does quite well. In fact, the utilities sector has had positive six-month performance after all three yield curve inversions after 1980, according to CNBC. During those six months, utilities returned an average 8.59%.

Utilities companies borrow heavily to fund their costly operations. Luckily, long-term loans are unusually affordable, with an interest barely over 2%. Thanks to the cheap credit, these companies are more likely to expand and grow their earnings. Low interest rates also incentivize investors to move out of low yielding bonds and into other assets with higher yields. Assets like utility stocks, which often pay handsome dividends and provide a yield that more than doubles the yield on government bonds.

Thus, in my view, the utilities sector presents an attractive investment opportunity. I suspect that I can outperform the general market over the next six months by buying an ETF that invests in a wide variety of utilities companies, like the Utilities Select Sector SPDR Fund (ticker: XLU).



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