ETF Insights| October 1, 2024
Price Action & Performance
The XLU traded to new all-time highs in September and has led all sectors in performance over the past 6 months by a wide margin. Sustained outperformance over the long-term is not a typical hallmark of the Utilities sector. But the break-out to all-time highs measures to a price target of $99. Typically, XLU generates the most alpha in a portfolio when prices are moving lower, but over the past 5 years Utilities has been the 2nd worst performing sector. Only Real Estate with its pandemic related challenges has performed worse, so there is more potential upside from reflation, especially if interest rates continue lower from here.
Oscillator work has stayed in a sustained overbought position since early August which is a bullish indication of a strong underlying uptrend for the sector. The MACD is still in a constructive position confirming the uptrend.
At the Industry we’ve seen broad improvement in performance with each industry within the sector beating the S&P 500 by more than 5% since July 1. The Independent Power & Renewables industry has been particularly strong outperforming by 23% over that timeframe.
At the stock level our favorite names are CEG, NRG and VST. We would caution that Utilities are not historically a good source of alpha generation in bull markets, but they are currently in a bullish price structure, and we will ride it till it shows evidence of breaking.
Economic and Policy Drivers
Since inflation emerged as the Fed’s most prominent threat, markets have been caught in a feedback loop comprising “a strong underlying economy à manifestation of marginal inflation à Fed talk of policy tightening à corrective action as investors contemplate a higher probability of recession/late cycle which discounts the market in the near-term à investors start to see opportunity and start bidding higher again”. There is evidence that the loop is now changing as inflation has continued to be stable and economic drivers of inflation like low unemployment, high wages and high input prices have weakened or changed the trend entirely. This has led to more discounting of dovish policy in the 2nd half of 2024. A switch to dovish policy expectations has been invigorating all laggard sectors in the near-term including XLU. We think the downside scenario for the sector would play out if optimism around interest rate policy easing sparks a renewal of inflationary trends. We’ve seen a near-term move higher in commodities prices already. If that sustains, the 6-month bullish reversal in XLU could be in jeopardy.
We like Utilities as a hedge against potential downsides in Growth sections of the market. The bull trend has been strong, with the S&P 500 appreciating well above its long-term expected return in 2024. With the intrinsic uncertainty of Presidential Election season upon us we see Utilities as useful add to the portfolio.
In Conclusion
XLU is likely to be useful in October as increasing uncertainty around the election may cause continued rotation and/or correction in equities. Our Elev8 Sector Model continues with an OVERWEIGHT allocation to XLU of +1.50% above the benchmark S&P 500.
Chart | XLU Technicals
- XLU (200-day m.a. | Relative to S&P 500 | MACD | RSI)
- XLU has been tracing out an intermediate-term bullish reversal over the past 5 months after lagging materially over 3 and 5yr periods. We like this setup for the sector
XLU Relative Performance | XLU Industry Relative Performance | 3-Months
XLU Street Analyst Ratings and Price Targets:
Data sourced from FactSet
