Former Alphavillain Alexandra Scaggs writing at Barron's, August 31:
Utilities and bank stocks are telling conflicting tales about the
outlook for the U.S. economic recovery. And the accuracy of each
sector’s pricing could be determined by what happens in Washington in coming weeks.
Both utility and financial stocks have underperformed the
S&P 500
this year. Utilities are down nearly 9% and banks are down 18%, compared with the large-cap index’s 8.5% advance.
That isn’t the way things normally work, as Morgan Stanley points out in a Monday note.
Economic environments in which banks underperform by a wide
margin—the way they have this year—are usually good for utilities’
stocks. The utilities sector’s implicit government backing and 3.5%
dividend yield provide safe revenue and income when slow economic growth
keeps interest rates low.
And interest rates are low. Treasury yields have tumbled this
year as the pandemic caused millions of job losses, brought travel to a
halt, and prompted the Federal Reserve to cut short-term interest rates
to zero. The 10-year yield is trading around 0.7% and the 30-year yield
is around 1.5%, down from 1.9% and 2.3% at the beginning of the year.
Utilities have underperformed the broader market anyway, a
trend that has continued over the past five weeks. That can be partly
attributed to an increasingly popular view among Wall Street and
investors that the worst is over for the pandemic-related economic
slowdown. Stocks have risen to records in recent weeks, while the
performance of safer securities such as long-term Treasuries have lagged
behind. Utilities rose on Monday, with the
Utilities Select Sector SPDR
(XLU) up 0.2% while 30-year bond yields fell five hundredths of a percentage point.
While worries about loan losses and other economic consequences
of the pandemic have been weighing down bank stocks, persistently low
U.S. interest rates haven’t helped bank share valuations, either.
Shareholders often use the gap between short-term and long-term
Treasury yields to gauge the outlook for banks’ interest income. The
gap between short-term Treasury yields and long-term Treasury yields
actually inverted back in February, when the pandemic first hit and
investors piled into the safety of longer-term Treasuries....
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