The Correction Continues, But Don’t Blame the Election

The S&P 500 Utilities Index has tumbled in the wake of the 2016 election, as the conventional wisdom holds that the results were bad for utility stocks.

Rising interest rates and the prospect of improved economic growth if the Trump administration delivers on its promised fiscal stimulus have given portfolio managers an excuse to rotate out of utility stocks and into cyclical fare. Unsustainably high valuations made this decision all the easier.

Conrad’s Utility Investor subscribers who followed our lead over the summer and took partial profits on their big winners and added exposure to ProShares UltraShort Utilities (NYSE: SDP) should be doing reasonably well, all things considered.

This exchange-traded fund, which delivers two times the Dow Jones US Utilities Index’s inverse daily performance, has rallied by about 25 percent—and we see the potential for more upside.

However, the most important point to take away from this issue of Conrad’s Utility Investor is that the underlying business conditions for our favorite utilities haven’t changed. The sector remains in excellent financial shape and has its best growth prospects in decades. Unfortunately, valuations remain frothy.

Election 2016 has created far more opportunity than risks for best-in-class utilities. But potential regulatory tailwinds are only one of the many factors that will drive returns going forward.