Utilities Re-Rated From Rate-Sensitivity to Growth

Increasing power demand is a secular tailwind behind the Utilities sector

Highlights

• Increasing power demand is a secular tailwind behind the Utilities sector

• It’s a multiple expansion-driven rally in the S&P 500

• Growing list of economic indicators have stagnated over the past 3 months

• Aging capital stock in the U.S. to support commodities demand

While We Were Sleeping

A mixed start to the day, much like yesterday’s action (the Dow was down triple-digits but the Nasdaq made it to a new all-time high on bullish expectations on what Nvidia is about to deliver on its earnings). U.S. futures are pointing to a flat open at the current time. European stocks are in the red to the tune of -0.3%.

And Asia gave up yesterday’s bounce (aided and abetted by Thailand’s better-than-expected Q1 real GDP posting… up +1.5% YoY, which was nearly double the +0.8% consensus forecast): Hong Kong (-2.1%), Thailand (-0.7%), Korea (-0.6%), China’s Shanghai Composite (-0.4%), Singapore (-0.4%), Japan’s Nikkei 225 (-0.3%), and Taiwan (-0.2%). Asia-Pacific finished the session with a -0.7% loss, while the EM complex is on pace to do the same.

Bond markets have a small bid today (10-year T-note yield down -1 basis point to 4.43%), helped along by the April PPI data out of Germany: +0.2% MoM versus the +0.3% consensus estimate, dragging the YoY pace to -3.3% from -2.9% in March (consensus here was -3.1%). It is equally quiet in the FX market, as the DXY dollar index has steadied at 104.55 (see Dollar Rally Reverses as Falling Inflation Lifts Rate Cut Hopes on page 10 of today’s FT). While Bitcoin has enjoyed a great day so far, up +2.1% to $70,972, both oil (Brent off -0.7% to $83.13 per barrel) and gold (-0.3% to $2,419 per ounce) lost ground (that said, I recommend a look at Gold Rally Made in China Looks Set to Persist On Haven Demand on page 18 of the FT; courtesy of the venerable Lex column). All market quotes are time-stamped to 4:30 a.m. ET.

Well, we finished last week with the major averages and all the eleven S&P 500 sectors sitting above their 200-day moving averages. That is sitting pretty indeed, but also is highly suggestive of overextension. Indeed, the index itself is at a nosebleed 12% above that trendline. The hallmark of a momentum-driven market. It is true that earnings have come in better than expected, but at the same time, growth in the “P” has outstripped that of the “E” by a factor of four. Hence, the multiple is pressing against 21x, which is more than 30% above the historical norm of 15.7x.

And ultra-low interest rates can no longer be reasonably cited as a factor. It is about confidence, animal spirits, sentiment, and a widespread belief that the business cycle has been repealed — underlined by a microscopic 12 VIX reading. More than three bulls for every lonely bear (and now, even Michael Wilson has left the building), and the Citi Panic/Euphoria sentiment index is back into frothy euphoria terrain. That basically is when confidence begins to morph into complacency.

There’s no recession, but somehow, every economic aggregate has contracted or virtually stagnated over the past three months (shhhh):

• Housing starts: -4.6% (annual rate)

• Non-residential construction: -2.8%

• Core capex orders: -1.1%

• Real personal disposable income: +0.4%

• Retail sales volumes: +0.9%

• Exports: +1.2%

Time now for a bullish comment. One of our major positive secular themes is infrastructure, and we recently penned a report on the unprecedented upgrade needs in the U.S. across transportation networks, the power grid, telecommunications, and replacing an aged and aging fleet of trains, planes, and automobiles.

The future is one of a replacement cycle to replenish a depleted capital stock, with obvious benefits to the commodity market (as copper soars to new all-time highs). This also applies to the ultra-old housing stock (alongside the fact that there is such a dearth of inventory and such low turnover activity in the resale market) — see Deck Maker Bets on Remodeling on page B1 of yesterday’s WSJ. This is an investible secular theme.

A Weak Yen Is a Gift For Visitors to Japan on page B1 is another one worth looking at for those willing and able to invest globally — perhaps also a look at the Global X Japan Leisure & Entertainment ETF, which is up +6% year-to-date.