Safe Investments, Predicted to Flop, Do Well in 2014
New York — Financial markets rarely stick to the script, and this year is no different.
Investments traditionally considered safe bets such as utilities, gold and government bonds were supposed to flop in 2014 as investors started to pour money into higher-risk, higher-growth stocks that would benefit from a pickup in the economy.
Instead, these safe investments are among the year’s best performers. Utilities, for example, are up more than twice as much as the next-best sector in the Standard & Poor’s 500 index.
The surprisingly strong returns from these so-called havens are happening for several reasons. In the U.S., a severe winter slowed the economy, and a slump in trendy technology stocks has undermined prices. From overseas, worries about China’s economy are growing and chaos in Ukraine has increased global political tensions. Those drags on the market have left the Dow Jones industrial average down 0.5 percent and the Nasdaq composite off 1.2 percent for the year. The S&P 500, meanwhile, has eked out a gain of 1.5 percent.
Safe and steady assets have fared much better.
Power companies in the S&P 500 are up 11.4 percent this year, making them the best performers in the index by far. The next-best performer is up 5.2 percent, and that’s energy stocks.
Investors buy utilities when they are worried about stock market volatility or the outlook for economic growth. Typically, utility stocks rise less than others when the overall market is climbing, but they fall less when prices are down. These stocks also pay big dividends, which are attractive to investors, particularly when bond yields are historically low, like they are now.
The dividend yield, a measure of a company’s dividend compared with its stock price, is 3.6 percent for utility companies in the S&P 500. That compares with a dividend yield of 1.5 percent for technology companies and a yield of 2.71 percent for 10-year Treasury notes.
“The dividends will provide you with some support,” says Phil Orlando, chief equity strategist at Federated Investors. “Those names will go down less than the names that don’t pay dividends.”
Exelon, a Chicago-based utility is up 31 percent this year and PSEG, a utility based in New Jersey, has gained 23 percent.
Gold has also been one of the year’s best-performing financial assets, climbing 6.8 percent to $1,284 an ounce. The price of the metal is rebounding after a 2013 slump of 28 percent, its biggest decline in more than 30 years.
Investors have also been buying gold as a hedge against a weakening dollar. The U.S. currency has dropped against the euro and the Japanese yen this year as the Federal Reserve has reiterated its message that it will continue its efforts to support the economy with low interest rates.
“We still view gold as one of the best alternatives, if the base case of U.S. economic growth and continued equity price appreciation stumbles,” says Mike McGlone, director of research at ETF Securities. “And so far, that is what has happened.”
Demand for gold as a safe asset has also risen as tensions between Russia and the West have escalated over Ukraine. Russia annexed the Crimea region on March 21.
Another explanation for gold’s gains is that investors’ psychology on the metal has shifted this year, after being unrelentingly negative for most of 2013. The metal fell as low as $1,187 an ounce in December, having climbed as high as $1,900 an ounce in August 2011.
“One of the best things to happen to gold this year was that 2013 ended,” McGlone says.
Many analysts expected Treasury prices to slump after the Fed announced in December that it would start winding down its massive monthly bond purchases. That program is aimed at stimulating the economy by holding down long-term borrowing rates for consumers and businesses.
But bond prices have climbed even as the Fed’s buying has slowed. Barclays index of U.S. Treasurys that mature within seven to 10 years has climbed 2.8 percent since the start of 2014, and long-maturity Treasury bonds have risen even more. The bank’s index of Treasurys with maturities of 20 years or more has surged 9.2 percent.
Prices got a lift when big investors like pension funds and insurance companies rebalanced their portfolios at the start of this year, booking some of their gains after stock prices had risen and buying bonds, says Kathy Jones, fixed income strategist at Charles Schwab.
While stocks had surged in 2013, bonds had declined, pushing up their yields. The 10-year Treasury yield stood at 1.76 percent at the start of 2013. It climbed to 2.97 percent by this January.
“If you think back to the beginning of the year, bond yields were up and stocks had just had a good year,” Jones says. “That 3 percent level, or close to it, was pretty attractive.”
Another reason for the strong performance of Treasurys is that inflation has remained tame. The latest reading of consumer prices showed that prices in March climbed just 1.5 percent from a year earlier, well below the 2 percent level that the Fed considers acceptable. Low inflation is good for bonds because it helps preserve the value of a bond’s fixed payments to investors.