The utility sector has quietly inched higher over the past week, moving into second place among major sectors in the market after yesterday’s 1%+ move higher. Here is the full ranking, courtesy of Global Macro Monitor:
The strength in utilities is notable since the top two performing sectors in the U.S. market so far in 2014 are not cyclicals. Utilities have been heavily avoided by fund managers for 2 years now, ever since U.S. Treasuries stopped their rapid ascent in the fall of 2011. The closeness of that relationship is exhibited by a chart comparing the XLU/SPY ratio (red) with TLT (green):
The ratio has moved almost in lockstep with Treasuries over the past 3 years. Both Treasuries and utilities have started 2014 on a strong note. The drop in long-term U.S. rates, despite the December taper announcement, has led to a subtle shift in sector performance in 2014. REITs, utilities, and precious metals miners (gold and silver have generally been positively correlated with bonds as well), which were major laggards in 2014, have been leaders this year.
The U.S. long-term interest rate has been called the most important price in the world by Stan Druckenmiller, and for good reason. The U.S. 10 year yield has remained below 3.0% over the past few weeks, and that level remains pivotal psychologically, not just for bond investors, but for sector selection for equity investors as well.