Two of the sectors that get the least attention are getting a lot of investor love.
Utilities and REITs, which are outperforming the broader market during the past week, hit record highs on Tuesday. The XLU utilities ETF and XLRE real estate ETF are up roughly 2 percent in the past five sessions, while the S&P 500 has been flat. The utilities sector is also the best performer in the past year.
Erin Gibbs, portfolio manager at S&P Global, says defensive sectors such as these should continue to get a bid if the Federal Reserve holds steady.
“We now foresee that interest rates are going to be kept very stable, very few raises this year. That has a big impact on their costs, so now we know their costs aren’t going to go up that much, if at all, and these guys are much more predictable,” Gibbs said on CNBC’s “Trading Nation” on Tuesday. “Even though they’re contracting, earnings, we at least know what’s going to happen.”
Companies with high debt, such as utilities, get hit hard by rising interest rates as the cost of borrowing increases. Slowing global economic growth is expected to keep a hold on the Fed’s rate hike plans this year.
“The second thing is these are some of the highest dividend-yielding stocks, and in this environment of slumming growth, increased uncertainty, it’s nice to have some lifeboat stocks just in case you happen to hit a storm,” said Gibbs. “These two combinations are really what’s bringing investors back to these stocks when they’ve been so out of favor for so long.”
The REITs sector yields 4.3 percent, while the utilities yield 3.3 percent.
Mark Newton of Newton Advisors also sees the two sectors outperforming, though only over the short term.
“The next three to five weeks we potentially could see a bit more strength. Both groups are up about 3 percent over the last month — utilities and REITs have both broken out,” Newton said on “Trading Nation.” “It’s odd to see that happen when the markets are rallying but … you do have the threat of an economic slowdown and yields are very, very low.”
However, a return to strength in the broader market could put an end to their rally, he adds.
“If the S&P gets above March highs, then the groups likely are going to start to stall out and slow down and really roll over,” said Newton. “I would really look to take profits as you get into April. I don’t think its outperformance continues particularly if the economy can start to strengthen a bit and continue its current path.”
The S&P 500 needs to rally 1 percent to get back to the month’s highs set last week. It is still 5 percent from its record set last September.