The Only Big Stocks Going Up

The only “big” stocks going up in the United States might surprise you.

Over the past 12 months, the Dow Jones U.S. Utility Index is up 28%. A price graph of the index, which represents the largest gas, electricity, and water utility companies in America, illustrates a straight upward moving line that started in early 2003.

The Dow Jones U.S. Utility Index is at an all-time price high and just keeps moving higher. Yes, the Dow Jones Industrial Average and the Dow Jones Transports both broke record highs earlier this year — but they are both still well below their 1999 highs if we take inflation into account. Meanwhile, the utility stocks continue to hit new after-inflation price highs.

Why are utility stocks rising in price so quickly? Three answers to this question:

First, it’s the flight to income. With so much capital and liquidity in the marketplace, a lot of money is chasing a few opportunities. This has brought down the yield on most investments, making the old “widow” utility stocks attractive for their income to all types of investors.

Second, the consensus among analysts has the Federal Reserve cutting interest rates this year to spur the slowing U.S. economy. Utility stocks act like bonds when interest rates fall; they move up in price.

And third, utility companies provide necessities consumers cannot live without. We all need gas in the winter to heat our homes and gas to heat our water… maybe even gas to cook. We all need electricity and water, too. There’s a school of thought out there that believes as these resources become more scarce and more expensive to provide the utility companies will make more money. It’s comparable to the oil companies making bigger profits when oil prices rise — as they have been lately (for example, Exxon’s multi-billion-dollar profits).

Would I buy utility stocks at this point? If I were looking for income, if I needed “safe” stocks for slow growth, if I believed the Fed will cut interest rates to jumpstart the slowing U.S. economy, and if I was looking for stocks that will not fall drastically during a market meltdown… the utility stocks are the only “big” stocks that continue to fit the bill.