Doug Ramsey, Chief Investment Officer of the $1.6 billion Leuthold Group, says utilities having been having a scary time as of late. Since the start of 2013, the Dow Jones Utilities Index is up 11%. Compare that to the Dow Jones Industrial Average's gain of 19% and the S&P 500's 24% rise.
"Even though this group has underperformed for the last five or six months, I don't like the values," says Ramsey. "I'm concerned they're still going to struggle against the background of higher interest rates."
Utility stocks are particularly sensitive to high interest rates because they tend to have higher leverage than the average company. Six months ago, the Federal Reserve Bank hinted that it may taper its $85 billion monthly bond-buying program which had helped keep interest rates down. That caused a major selloff in bonds and, in turn, higher rates over the summer. Over the last six months, the Dow Jones Utilities Average dropped 6% while the Dow Jones Industrial Average climbed 5%. Though it looks like the Fed won't taper any time soon, rates have yet to return to their May 2013 levels.
"The other point of why this is concerning is the utilities from a broader market perspective have a pretty good record of being a bellwether for the rest of the market," notes Ramsey. "The problem is the lead time can be fairly extended. So, it's been six months since we saw a high in utilities. Their lead time historically in advance of the rest of the market has been six to twelve months. So, I think it's also a longer-term potential warning sign for the broader market. "
However, Ramsey isn't negative on the markets. He sees another sector that gives the market hope, namely transportation stocks. The Dow Jones Transportation Index is up 13% over the past six months.
"It's a strong sign for the economy," says Ramsey on the transportation sector. "It's generally been a strong sign for the markets to have the transports outperforming the industrials."
To see Ramsey's charts on the utilities and his discussion of what has just changed in the markets to confirm a larger trend, watch the video above.