They’ve been the black sheep of the stock market family, living in the shadows of their more glamorous siblings, like technology, health-care and consumer-discretionary stocks.
But now it’s their time in the sun. Utilities and telecom stocks, the ultimate widow and orphan stocks, have begun to shine.
So far in 2016, telecoms and utilities have outpaced the other eight sectors in the SP 500, both racking up gains of around 15% through April 4, according to Yardeni Research.
They also have led the pack over the past 12 months, advancing by more than 12%, Fidelity reports.
These big gains follow years of underperformance.
The Utilities Select Sector SPDR
rose 114% from the beginning of the bull market in March 2009 until last Friday — one-third as much as the consumer discretionary SPDR and about half as much as technology, health care, or the overall SP 500.
The Telecom Select Sector SPDR
has done even worse over the long haul, gaining a mere 7% since it started trading in January 2011.
So what’s behind their remarkable recent comeback?
I asked Roger Conrad, now editor of Capitalist Times and Conrad’s Utility Investor, who spent nearly a quarter-century at the helm of Utility Forecaster, where he compiled an impressive track record, according to The Hulbert Financial Digest. (Full disclosure: I’ve known Roger for years, although I don’t invest with him.)
One obvious cause of these stocks’ renaissance is investors’ move away from risk amid the past year’s volatility. But two deeper trends also are at work, Conrad told me in a phone interview.
First is the Federal Reserve. Utilities underperformed during the “taper tantrum” after former Fed Chairman Ben Bernanke first started discussing the end of quantitative easing in 2013 as investors and traders sold utilities to buy financial stocks.
Rock-solid stocks for defensive investors
But lately, the Fed under Janet Yellen has backtracked a bit on its plan to bring rates back to “normal,” and utilities stocks have benefited. Conrad also found that contrary to conventional wisdom, utility stocks “had one of their best two-year performances ever” from June 2004 to June 2006, gaining about 60% as the federal funds rate rose from 1% to 5.25%.
Also, he said the sector was now in a “virtuous cycle,” propelled by structural changes in how power is purchased and delivered.
These are no longer your grandfather’s utilities, burning filthy coal and squeezing reluctant rate payers and regulators for every penny of profit.