The utility sector of the S&P 500 has recently experienced a significant decline due to rising interest rates, reaching an unusually oversold level, according to Bespoke Investment Group. As of Monday, the sector closed “3.2 standard deviations below its 50-day moving average,” the most oversold reading since February 2021. This level of oversold territory is quite rare for the sector.
Over the past five trading days leading up to Monday, the utility sector of the S&P 500 has plummeted by 11.2% as Treasury yields have risen. In comparison, the broader S&P 500 index only slipped by 1.1% during the same period, according to FactSet data.
Although the current decline of 11% in the utility sector over a five-day span is the steepest since last June, there is a notable difference between these two periods. In June 2022, the decline was accompanied by a more significant drop in the S&P 500 index, with a decrease of over 10% during that same five-day period. Currently, the S&P 500 index is only down by 1% in the corresponding five days.
Upon analyzing the performance of the utility sector in relation to the S&P 500, Bespoke found that it is underperforming by the widest margin over a five-day period since October 2022.
In addition to the impact of rising rates, the yield on the 10-year Treasury note (BX:TMUBMUSD10Y) rose about 11 basis points on Tuesday afternoon to approximately 4.79%. This increase followed fresh economic data that revealed a rise in job openings within the growing U.S. economy.
Moreover, on Monday, the rate on the 10-year Treasury note reached its highest yield since October 12, 2007, based on 3 p.m. Eastern Time yields, according to Dow Jones Market Data.
At last check, two-year Treasury yields (BX:TMUBMUSD02Y), which have been trading higher than 10-year rates, were up by around five basis points on Tuesday afternoon, standing at approximately 5.15%, as per FactSet data.
Defensive Investors Turning to Utilities Sector
Investors often shift their focus to utilities as a defensive area of the stock market during times of economic downturn. Although this sector is well-known for its dividend-paying stocks, the recent rise in bond yields has attracted investors due to the Federal Reserve’s rate hiking campaign.
Concerns over Utilities Select Sector SPDR Fund
Katie Stockton, the founder of Fairlead Strategies, issued a warning in early September that the Utilities Select Sector SPDR Fund (XLU), an exchange-traded fund that tracks utilities stocks in the S&P 500, had experienced a significant decline.
According to Fairlead Strategies, while there are short-term indications of downside exhaustion, negative momentum continues to be a dominant force impacting the ETF.
After experiencing a 4.7% decline on Monday, the S&P 500 utility sector index (XX:SP500.55) managed to recover slightly, rising by 0.2% on Tuesday afternoon. However, it remains well below its 50-day moving average.
Utilities Stocks Lag Behind
Utilities stocks have been the worst-performing sector within the S&P 500 this year, with a plunge of over 20% as of early afternoon Tuesday, according to FactSet data.
Investors have withdrawn nearly $453 million from the Utilities Select Sector SPDR Fund in 2023, including $377 million in just the past week.
In contrast, the S&P 500 index has still seen gains of more than 10% so far this year. These gains have been largely driven by a select group of “Big Tech” companies that have experienced significant growth. However, concerns have arisen in both September and August due to the surge in Treasury yields.
Stock Market Continues Decline
As rates continue to rise, the U.S. stock market has suffered a sharp decline on Tuesday afternoon. The Dow Jones Industrial Average (DJIA) was down 1.1%, the S&P 500 (SPX) dropped 1.2%, and the Nasdaq Composite (COMP) slid 1.6%, according to FactSet data.
Overall, the utilities sector remains a focal point for investors, with significant volatility and negative momentum impacting the Utilities Select Sector SPDR Fund. As the stock market faces ongoing challenges with rising rates, it is important for investors to carefully navigate these uncertain times.
