Utilities lead the way in Q1: Why that’s a problem

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Lots of discussion over the weekend about the one-month anniversary of the Great Turnaround, that day on Feb. 11 when everything—stocks, commodities, the dollar—reversed.

The good news is that the most beaten-up sectors — energy, materials, and financials — have had the biggest moves:

Sectors since 2/11

  • Energy: 13.7 percent
  • Materials: 13.9 percent
  • Financials: 14.1 percent
  • Consumer discretionary: 12.5 percent
  • Tech: 11 percent
  • Health care: 10.5 percent
  • Telecommunications: 6.9 percent
  • Consumer staples: 5.9 percent
  • Utilities: 5 percent

What’s more interesting is that the most defensive sectors — utilities and telecommunications — continue to post gains and are far and away the biggest gainers this quarter. Nothing else even comes close, despite the big rallies in the last month:

Sectors Leaders YTD

  • Telecom: up 12.3 percent
  • Utilities: up 10.4 percent
  • Consumer staples: up 3.3 percent
  • Energy: up 3.0 percent
  • Materials: up 1.7 percent

I certainly get the case for utilities:

1) Less vulnerable to the economy

2) Dividend yields near 4 percent at a time of low interest rates

3) Consistent dividend growth rate of around 5 percent

4) Low coal and natural gas prices reduces need to raise prices to customers.

The problem I have with utilities is that they do not historically make for great leadership in the overall market.

It’s fairly rare that utilities are a leader, particularly in the first quarter of the year.

According to Kensho, since 1990 there have only been five first quarters where Utilities were #1 or #2 sector performers.

In those five years, the S&P 500 was positive 80 percent of the time for the full year. The median return for the full year during those periods has been a mediocre 3.4 percent.

Not exactly inspiring.

Disclosure: NBCUniversal, parent of CNBC, is a minority investor in Kensho.

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