After registering record declines on Oct 10, all the three key U.S. indexes posted significant losses for the week ended Oct 12. Higher bond yields and renewed fears of a trade war may find investors scurrying toward safe-haven sectors that have already emerged as preferred investments.
One of the most-popular, safe-haven sectors is utilities. This sector comprises companies that provide telephone, gas, water and electricity services. In this context, investors looking for stable dividend and interest income can opt to invest in mutual funds having significant exposure in utilities stocks.
Indexes on Choppy Ground
The second week of October was the worst one since March. All three major stock indexes — the Dow, S&P 500 and Nasdaq Composite — declined 4.2%, 4.1%, and 3.7%, respectively. For both the Dow 30 and S&P 500, it was the third straight weekly loss, while Nasdaq Composite posted its second successive weekly decline. Notably, the S&P 500 posted its longest weekly drop since the Brexit referendum in June 2016. Consequently, the CBOE Volatility Index (VIX) reached its highest level since February.
A sudden increase in long-term bond yields weigh on the equity market as a rapid increase in bond yields boost borrowing costs. Last week’s stock market mayhem started due to a spike in the yields of 10-year and 30-year U.S. Treasury note buoyed by a series of strong economic data.
Additionally, the Fed has already raised its federal funds rate for the third time this year. The Fed’s aggressive rate hike approach invited criticism from President Trump, with the President saying that “the Fed is making a mistake.” A high-interest rate environment along with continued trade war tensions between the United States and China weighed on investor sentiment and resulted in this carnage.
Why Buy Utilities Funds?
Among the safe-haven sectors, utilities could be good investments because this segment offers protection against a downward trending market. Investors with a conservative mindset looking for stable current income would do well to consider utility funds. They are used as defensive instruments, which protect investments during a market downturn. This is because demand for essential services such as those provided by utilities remains unchanged even during difficult times.
