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Utilities: From Hero to Zero and Back Again?

One of the best-performing sectors over the past decade has also been one of the most boring


“As you get older, it is harder to have heroes, but it is sort of necessary.” – Earnest Hemingway

While many investors are aware of how difficult broad stock market investing has been since the tech bubble burst in early 2000, few may realize that one of the best-performing sectors over the past decade has also been one of the most boring to watch on a day-to-day basis.

Utilities, which investors flock to not for capital appreciation but for stable dividends, generally perform well in periods marked by volatility, economic uncertainty and fear.

One way of showing this is to take a look at the price ratio of the iShares Dow Jones Utilities Average ETF (NYSE:IDU) relative to the Dow Jones Industrial Average (DIA). As a reminder, a rising price ratio means the numerator/IDU is outperforming (up more/down less) the denominator/DIA.
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I’ve annotated the chart to show how utilities were effectively the hero of 2011 as the European crisis took hold and as the summer crash unfolded.

The ratio bottomed out in late February and gradually performed better than the broader market until late September before the “fall melt up” I began writing about around that time took place.

The hero during the crisis ended up being a zero in 2012 as animal spirits returned to markets. This should make sense since investors take on more risk when hope for growth returns.

Notice the far right of the chart. The ratio appears to have bottomed in mid-March as investors grew more concerned about what the lack of QE3 from the Fed may do, and as job growth is questioned.

A period of strength may be at hand, but I suspect not in a way that would take the sector back to significant outperformance. This period may be more akin to November/December 2009, which resulted in a mini-period of strength before resuming underperformance.

If you want to be in equities, utilities may not be a bad place to park some money in the near term.

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