|Trader Michael Gallucci works at his post on the floor of the New York Stock Exchange on March 11. Utility stocks have uncharacteristically been as susceptible as the broader market to recent volatility.
Source: AP Photo
During a historic week in which markets fell to their lowest levels in more than 30 years, the typically defensive U.S. utility sector also went on a roller-coaster ride.
"The old saw is that as the market goes down and that rate of decline accelerates, all correlations tend to move to one," John Bartlett, portfolio manager and electric utility analyst at Reaves Asset Management, said in a March 12 phone interview. "The fact that utilities haven't shown as much defensive mettle in this downturn is as much about the rate of decline of the stock market than it is anything else."
The S&P 500 tumbled as much as 8.5% on March 12 after trading resumed following a 15-minute halt minutes after the opening bell. The trading halt was the second "circuit breaker" of the week after the accelerated spread of the new coronavirus and an oil price collapse fueled fears of a recession.
The S&P 500 continued to plummet after a brief respite before closing down 9.51% at 2,480.64. The Federal Reserve announced March 12 that it was ready to inject at least $1.5 trillion in cash into the financial system to ease liquidity strains.
But the equity sell-off ramped up after stocks pared some of their losses following the announcement.
The Dow Jones Industrial Average fell about 10% to 21,200.62, and the Nasdaq Composite ended the trading day 9.43% lower at 7,201.80. It was the steepest single-day loss for U.S. equities since the 1987 crash.
The S&P 500 Utilities sector finished down 10.19% on March 12, and the Dow Jones Utility Average fell 10.9%. The S&P 500 Energy sector ended the day down 12.3%.
Markets rebounded March 13, but some utilities continued to fall.
After closing at $101.64 on March 12, Entergy Corp. stock was down nearly 4% as of 11:33 a.m. ET on March 13.
NextEra Energy Inc. stock closed at $208.89 on March 12, after closing at $241.26 on March 11, and continued to fall by more than 5% in intraday trading March 13.
Dominion Energy Inc., Duke Energy Corp. and FirstEnergy Corp. were among the utilities trading up March 13.
Top and bottom performers
The bottom performers of the S&P 500 Utilities index from market close Feb. 28 through market close March 12 included NRG Energy Inc., Edison International, Sempra Energy, AES Corp. and CenterPoint Energy Inc., which lost 35.4% of its total return over the time period, according to S&P Global Market Intelligence data.
New York utility Consolidated Edison Inc. was the only company in the index with a positive total return between Feb. 28 and March 12, the analysis shows. Con Edison gained 6.3% in total return over the tracked time period.
California utility PG&E Corp., which was dropped from the S&P 500 Utilities index after filing for bankruptcy in January 2019, lost 41.6% in total return from Feb. 28 through March 12.
A safe haven?
On March 9, the S&P 500 Utilities sector finished 5.64% lower but not nearly as bad as the S&P 500 Energy sector, which ended the day down 20.08%.
Renewable energy companies also were battered in a March 9 market plunge, with the Invesco Solar ETF falling 13.42%. The exchanged-traded fund includes Enphase Energy, Sunrun Inc. and First Solar Inc.
"When there is so much panic and dislocation in the market, the tendency is to take profits anywhere and everywhere," Pavel Molchanov, an analyst at Raymond James & Associates, said in a March 9 email to S&P Global Market Intelligence. "That includes clean tech, which has been one of the market's strongest sectors over the past six-plus months."
Stocks climbed March 10 after President Donald Trump floated a financial relief package to offset the economic fallout from the coronavirus outbreak. U.S. utility stocks ended the day mixed.
"We have seen a lot of days where the markets swing 3%, 4%, 5% or more in either direction and on those days, it's really hard to say if utilities will move in the same direction ... or if they'll move in the opposite direction," Scotia Capital (USA) Inc. analyst Andrew Weisel said in a March 10 phone interview.
Weisel, however, said U.S. utilities are defensive and still provide a safe haven for investors despite the turbulence in equity and bond markets.
The analyst said he is focused on the "smooth-out trend" for the sector.
"Meaning over the course of a week, a month or longer, the utilities should perform as low-beta defense stocks, and that's true in both directions," Weisel said.
Bartlett does not think the "defensive nature of the underlying businesses" has really been impaired.
"When people are ready to return to the stock market, I think people will be very happy to return to utilities, and they'll like what they find there," Bartlett said. "What I'm really convinced of, and the punchline to this is that I don't believe, at this point, anything that's going on out there is going to lead to permanent capital impairment for utilities."
Morgan Stanley & Co. LLC also cautioned against investors fleeing the sector.
"On the utility side, we feel this is a fairly unusual buying opportunity, and the relationship that we really focus on a great deal is the difference between BBB corporate bond yields and utility dividend yields," Morgan Stanley analyst Stephen Byrd said in a March 11 interview. "Historically, on average, corporate bonds yielded about 2.5% more than utility dividend yields, and that kind of makes sense because if you buy a utility you get growth. If you buy a bond you don't, so bonds would have to yield more to factor in the lack of growth.
"Right now, the delta is about 40 basis points instead of 250, and that's fairly rare, that's at a historic low point," Byrd added.
Wall Street analysts also have not forecast consolidation in the sector driven by the volatility in the stock market.
"I don't think anybody needs a rescue in the utility group," Bartlett said. "And I don't think that any amount of market gyrations are going to cause a big enough disconnect to make the economic value proposition of mergers and acquisitions work."