Is There Any Hope for These Three Rate-Sensitive Sectors?

Mike Larson

Amid all the euphoria about Dow-almost-20,000, one group of stocks got left out of the party. Interest rate-sensitive sectors.

Just look at this table showing the recent performance of investments like the Utilities Select Sector SPDR Fund (XLU, Rated “B”), the Consumer Staples Select Sector SPDR Fund (XLP, Rated “B”), or the iShares U.S. Real Estate ETF (IYR, Rated “C+”). I’ve also shown the performance of competing investments like the Financial Select Sector SPDR Fund (XLF, Rated “B”) and the Materials Select Sector SPDR Fund (XLB, Rated “C+”).

You can see that while all of those sector ETFs are showing positive three-month returns, the performance gap is sizable. Financial stocks have jumped by more than 18%, while materials stocks have climbed almost 9%. But utilities are up just over 2% in the same time period. The consumer staples sector has gained only 1.6%, while the real estate sector has barely budged.

What gives? Utilities, consumer staples, and Real Estate Investment Trusts (REITs) are interest-sensitive. That means they tend to trade more with the bond market than the stock market. When bond prices rise, they rise. When bond prices fall, they fall.

Since it hit a high of around $143-and-change, the benchmark iShares 20+ Year Treasury Bond ETF (TLT, Rated “C”) has fallen virtually nonstop. In fact, it’s down around 8% in the past three months and almost 12% in the past six.

So is there any hope for these lagging sectors? Should you go bottom fishing in REITs or utilities?

It really all comes down to Trump-enomics. If his programs fail and the economy can’t get off the mat, bond prices will rise and so will rate-sensitive stocks. If his programs succeed and growth accelerates, both bonds and rate-sensitive shares will lag.

The latest figures on everything from housing starts to industrial production to regional economic confidence have come in hot. That suggests the post-election economic bounce is real, or at least that investors and consumers believe it is.

So yes, bonds look deeply oversold. That means we could get a bounce in these sectors at some point. But unless and until the economic fundamentals deteriorate, or recent rate trends reverse, you’re better off looking elsewhere if you want income and capital gains.

To help get you started, I created a Weiss Ratings Screener showcasing stocks with better-than-market dividend yields (between 2.35% and 10%). I further narrowed that list down to stocks with three-month total returns of at least 2.37% or higher, as that was the best performance of any of the rate-sensitive ETFs listed earlier. Finally, I filtered out any stocks that weren’t BUY-rated.

Check out the results online here. You’ll find that many of the stocks listed are Business Development Companies (BDCs), which I wrote about in more detail last week.

As a reminder, you’ll need a Weiss Platinum subscription to use our full-featured stock screeners. So be sure to sign up if you haven’t already. And be sure to do it soon … Because right now we are offering our Platinum memberships for half off the regular price, and you get three valuable bonuses. Click here for details.

Until next time,

Mike

Mike Larson, Senior Analyst

ETF Spotlight Edition, by Mike Larson, Senior Analyst

Mike Larson is a Senior Analyst for Weiss Ratings. 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, As-sociated Press, Reuters, CNNMoney and many others.

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