Flight to Safety Investments
April was a rough month for stocks. The S&P 500 fell 4%, the Dow fell 4.4%, and the tech-heavy NASDAQ Composite fell 4.5%.
But the market has since made quite a rebound and it’s been LED by two sectors that typically outperform the market when the economy is facing a downturn:
These two sectors are the Utilities sector and the Consumer Staples sector — you can find them frequently traded under the tickers XLU and XLP.
Since April 1st, the Utilities sector (XLU) has risen 9.39%. Meanwhile, the Consumer Discretionary sector (XLP) has increased 2.1%.
Now, that certainly isn’t bad performance for an entire sector comprised of dozens of companies.
But here, we target even bigger gains with our options trades. And I am happy to report that our first trade in my new service, Automated Options, was on XLU on April 26th.
On May 1st, we sold for a 53.85% gain.
Between April 26th, and May 1st (the time our trade was open) the S&P fell 1.6%, the Dow fell 0.88%, and the Nasdaq Composite fell 2%.
I’ll say it again:
We made a 53.85% return. We made money while the rest of the market went down!
I am ecstatic that my new system is working so well. But I am digressing from the point of today’s essay.
A Flight to Safety
I like to think of the Utilities sector as a back door indicator into the confidence of the overall market.
When you see the “boring sectors” like utilities ripping upward to me it indicates that people are fearful. There is a flight to safety. People are returning to the comfort of the safe stocks that are the most basic of necessities that we, as people, need to survive.
When markets are up as much as they are over the last year (S&P +26%, Dow +17%, and Nasdaq +34%) people get nervous.
That “too big to fail mindset” we saw prior to the Great Recession is gone. And when things keep going up, up, up… people realize that at some point the market is going to have to capitulate downward.
And because of this, we see investors taking profits and rotating into more defensive sectors, such as utilities.
The Utilities sector is incredibly interest rate-sensitive. And investors are capitalizing on the Fed’s message last week that another hike in interest rates is unlikely.
Another factor helping to drive utilities higher is the sector’s earnings throughout the course of this earnings season. Earnings for utilities companies are up 26.7% compared to the same quarter last year.
This is the second highest growth rate of any sector right now.
More Growth Drivers
There are also several other events driving growth in the Utilities sector right now — one of which I wrote to you about on May 2nd — and that’s the growth in energy demand from artificial intelligence, data centers, and electric vehicles.
Although energy and utilities are two completely separate sectors, the two are very closely intertwined.
Another reason investors are running towards those flight-to-safety type stocks is because of the weaker-than-expected jobs report and poor GDP growth reported back in April for the first quarter of this year.
This culminated in Wall Street and everyday investors putting more money into these safer stocks.
Morgan Stanley, one of the largest investment firms in the world, even echoed this sentiment, with the company’s Chief Investment Officer writing a note to clients and sharing that they might want to consider a little bit of exposure to defensive sectors like Utilities and Consumer Staples if poor economic data continues to come in.
Let’s keep an eye on the Utilities sector as a back door indicator into the confidence of the overall market.
XLU continues to rip upward this week indicating a market that remains fearful.
Let’s keep watching and capitalize on these moves.
To your success,
— Nate Tucci
