Lower Rates Favor These Stock Sectors But How Long Will it Last?


When younger investors talk about a bull market, they often mention the glamorous, attractive companies they hear about on TV, or whose products they use in their daily lives. Think Amazon.com, Apple, and Google.

Investors of an earlier generation may picture big industrial household names like IBM, Caterpillar, or General Electric.

But utilities like Duke Energy, household products companies like Clorox and General Mill, or the boring stodgy telecommunications providers like Verizon and AT&T they’re not supposed to be the bull market standard bearers … but in the last several months, they have been!

Take a look at this table that shows how various stock market sectors performed in the one year through mid-July:

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You can see that energy shares, as represented by the Energy Select Sector SPDR Fund (XLE), dropped about 7% during that time. Transports and financials lost roughly the same amount, while biotech’s got slaughtered to the tune of almost 30%.

On the flip side, stodgy telecoms were up more than 15%. Consumer staples companies jumped more than 17%. Utilities surged almost 30%.

Not only that, but plain-vanilla long-term Treasuries jumped more than 25%. And zero-coupon Treasury bonds — those with the most interest rate/duration risk on the yield curve — surged almost 40% in value, as measured by the Pimco 25+ Year Zero Coupon U.S. Treasury Index ETF (ZROZ).

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There’s a message coming from the markets here. Investors are saying they don’t believe that economic growth or inflation will be a problem. They don’t believe that central bank easing is working for the real economy.

They don’t believe interest rates will shoot up. So they’re buying stocks that do better in a lousy economy, and avoiding those that need strong GDP to generate significant profit and sales growth. They’re also piling into long-duration bonds.

Unless and until the economic backdrop changes, the trend will continue. But given how stretched these stocks (and long-term bonds) have gotten, sharp corrections are always possible. We saw one in mid-July, and we had other minor hiccups in February and April.

So if you’re going to speculate on weak growth and low rates by owning utilities, telecoms, and consumer staples, consider waiting for one of those pullbacks to get on board … and be sure to take some profits along the way!

Until next time,

Mike Larson

Mike Larson is a Senior Analyst for Weiss Research, and is also the creator of the course “How to Profit From Rising Interest Rates”. A graduate of Boston University, Mike Larson formerly worked at Bankrate.com and Bloomberg News, and is regularly featured on CNBC, CNN, Fox Business News and Bloomberg Television as well as many national radio programs. Due to the astonishing accuracy of his forecasts and warnings, Mike Larson is often quoted by the Washington Post, Chicago Tribune, Associated Press, Reuters, CNNMoney and many others.