I nvestors threw utility stocks out the window Friday. The Labor Department’s eye-popping employment report seemed to seal the deal that the Federal Reserve will raise interest rates soon.
The CME FedWatch tool registered a 70% chance the Fed will raise rates at its Dec. 16 meeting. The odds are calculated from action in the fed funds futures markets.
The government reported that 271,000 jobs were created in October, well above the 185,000 that economists forecast. The unemployment rate fell to 5% from 5.1% in September, the lowest in 7-1/2 years.
TheSPDR Utilities ( XLU ) ETF gapped down and dropped nearly 4%.
Southern ( SO ),Consolidated Edison (ED,),American Electric Power ( AEP ) andGreat Plains Energy ( GXP ) were all among stocks that suffered stiff declines. Utility stocks don’t do well in an environment of rising interest rates for a couple of reasons.
Utilities tend to have heavy debt loads to upgrade and maintain their facilities. Rising rates make that more expensive.
Also, dividend-paying utilities compete with interest-bearing securities, such as bonds, for investors’ affections.
As interest rates rise, dividend-paying stocks become less attractive.
The yield on the 10-year Treasury note has been rising for several weeks and jumped sharply on Friday.
Utility industry groups were among the worst performers Friday.
Diversified utilities fell 3.8%, electric utilities fell 3.5%, and water supply utilities and natural gas distributors were down 2.9%.
Utilities have not been top performers this year. With the S&P 500 up 2% going into Friday, diversified utilities were off 8.4% year to date and electric power utilities were down 10.7%. Water utilities managed a 1.9% gain in the same time frame, and natgas distributors were up 2.2%.
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