To The Moon

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As inflation pressure eases and the Fed's hawkish stance begins to soften, utility stocks, which have been the worst performers this year, may usher in the best buying opportunity in the new year. Institutional investors seem to have smelled the sign of a trend reversal and started to re-enter the utility sector.

Back in August, the utility sector saw a year-to-date decline of as much as 11%, ranking at the bottom among all sectors of $S&P 500(.SPX)$, far exceeding the second-last real estate sector (-3.2%), while IT sector led the gain with a 37.5% increase over the same period. In September, NextEra's stock price plummeted to a three-year low due to its subsidiary $NextEra Energy Partners LP(NEP)$ significantly lowering its annual dividend growth prospects from the previous 12%-15% to 5%-8% at least until 2026.

However, by the end of November, the tech sector was struggling.

In the stock market, safe-haven stocks represented by utilities, and growth stocks represented by tech, seem to be at the opposite ends of the defensive and offensive spectrum, with stock price trends often going in opposite directions.

This summer and early autumn, utility stocks fell as Treasury yields rose, and now as Treasury yields have retreated, tech stocks have come under pressure while utility stocks are strengthening.

These safe-haven stocks provide public services, and for investors, they offer two key investment values: stable dividends and lower volatility.

If utility stock prices surge, we can basically expect increased market volatility. In other words, if utility stocks show violent fluctuations, it means that investors are pouring into safe havens, indicating that market volatility will increase in the short term, at least in terms of investor sentiment.

Currently, utility stock prices have not seen a significant increase, nor have there been signs of a large influx of investors seeking refuge in this sector, but the trend seems to have reversed.

Inflation Rate, Fed, and US Treasury Yields

The Fed decided to keep interest rates unchanged within the range of 5.25-5.5% on November 3rd. Rising interest rates push up yields, encouraging more capital inflows into bonds and interest rate products. Although the Fed has not yet initiated a rate cut, expectations have been formed, which will benefit utility stocks.

Robert Pavlik, Senior Portfolio Manager at Dakota Wealth Management, stated that the trend in data aligns with the Fed's expectations, and as economic growth slows, the Fed will adjust its policy tools, with rates expected to be lowered by 25-50 basis points by the summer of 2024.

For more conservative investors, in a high-interest-rate environment, bonds are more attractive than utility stocks, and vice versa. 2008 is an example, when interest rates dropped to nearly zero, and conservative investors were also driven into the utility sector.

Nowadays, the bond frenzy is about to end, which means utility stocks are about to rise. At this inflection point, utility stocks are cheap, and now may be an excellent buying opportunity for investors to position themselves before the rate cut.

Hedge funds seem to have also caught the scent, betting on utility stocks.

For example, $ONE Gas(OGS)$ had a disappointing third-quarter report, with total revenue dropping 7% year-over-year, but 16 hedge funds hold this utility stock. Additionally, $New Jersey Resources(NJR)$, which has seen its stock price fall nearly 13% so far this year, currently has 18 hedge funds invested.

At the same time, $Altus Power(AMPS)$, whose stock price has fallen over 17% with investments from 18 hedge funds. Finally, growth stocks $NextEra(NEE)$ and king of dividend $Black Hills(BKH)$ also have very cheap stock prices.