Home News Not So Safe: What Does Slide In Real Estate And Utilities Mean For The S&P?

Not So Safe: What Does Slide In Real Estate And Utilities Mean For The S&P?

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  • Two defensive sectors outperformed the overall stock market
  • But recently it has endured a lot of selling pressure
  • Important signals can appear in sector rotation
  • Washout in market retreat brings S&P 500 one step closer to tradeable lows

The two sectors that outperformed throughout most of 2022 were and . With real assets performing well in periods of inflation and consumers still doing well, house prices and rents should do relatively better than cyclical chip stocks and industry performance.

In the utility sector, the stable and reliable (some might say boring) electricity suppliers and companies that own critical energy transmission lines should not be blamed for recession. So when other stocks plummeted, these groups fared well. Through September, real estate and utility returns improve.

Source: Stockcharts.com

Massive Relative Collapse in Real Estate and Utilities

Annual income from real estate and utilities

Annual income from real estate and utilities

Source: Goldman Sachs Investment Research

A new variable threw a wrench into that thesis. First, the highest mortgage rates in 22 years (over 7% as of Monday afternoon) will lead to at least a short-term slump in real estate deals, hurting some of his REITs. It is certain. Moreover, as history shows, even real estate companies S&P 500 When times get really rough (see 2008).

Soaring Mortgage Rates Hit Residential REITs

mortgage interest rate

mortgage interest rate

Source: Mortgage News Daily

Utilities, on the other hand, underperformed SPX by more than 20% last month due to recent interest rate hikes. With yields on US Treasuries rising from his 3.5% to over 4%, the ball game for high-yielding utilities may have changed. Now there are safer alternatives. Hello, I’m Tina.

US bond market falls for 11th consecutive week

Source: JP Morgan

So what does this mean for investors and what moves should they make? I think it’s a positive sign for Think about it like this: For stocks to bottom out and surrender to happen, everyone needs to be in the bearish pool. Both an outperforming industry and an ultra-washed-out name should fall together. Perhaps this is the first step in that bottoming out process.

Another way we can provide clues about where we stand in the market cycle is by analyzing sector rotation trends. According to Sam Stovall’s, in an inflationary environment, utilities and real estate sectors tend to outperform just before the market bottoms out. S&P Sector Rotation GuideThat outperformance is gone. Are we nearing the bottom of the market as a result? We never know, but look to the financial sector (which is currently outperforming) and the sector of new leadership before getting confident in the true lows. .

Sector turnaround: past peak relative strength of utilities and real estate

S&P Sector Rotation

Source: Stockcharts.com


While everyone’s eyes are on earnings season, the Fed, and megacap growth stocks in the coming weeks, pay attention to what’s happening in two smaller, somewhat defensive spots in the market. Real Estate and Utilities were relatively positive a year ago for most of the third quarter, but are now rolling over. This could indicate that the market cycle has gone one step further towards market lows.

Disclaimer: Mike Zaccardi does not own any securities referenced in this article.

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