Rising costs could adversely affect the utilities sector, which has experienced weakness for most of the year, but the Direxion Daily Utilities Bull 3X Shares (UTSL) is still up almost 30% within the past month.
Overall, however, the utilities sector has actually fared quite well this year based on the performance of the S&P 500 Utilities index. It’s down 5% for the year, which isn’t as bad as other sectors that have been hit by inflation fears this year.
That same index is also up about 4% so far in the fourth and final quarter of 2022 and 2% within the past month. That said, headwinds do exist when looking ahead, particularly with regard to rising consumer costs, which could eventually eat into corporate profits.
UTSL seeks daily investment results equal to 300% of the daily performance of the Utilities Select Sector Index. That extra juice from the triple exposure could amplify profits should the utilities sector roar back in 2023, especially if a safe haven scramble takes place if the U.S. economy enters a recession.
Headwinds Blowing in the Direction of Utilities?
Despite the utilities sector remaining relatively staid versus other sectors this year, there are still challenges forthcoming. Inflation continues to be a wild card in the capital markets, and the utilities sector isn’t immune to its effects.
According to a Utility Dive article, global ratings firm Moody’s had some concerns moving forward. As mentioned, all signs point to the same issues, such as inflation and rising interest rates, which have been plaguing the markets all year.
“Moody’s Investors Service on Friday lowered its outlook for the U.S. regulated utility sector to negative, warning that high natural gas prices, inflation and rising interest rates could mean power providers struggle to promptly recover their costs,” the article said. “Rising natural gas prices, according to Moody’s could persist into 2023, which could hurt cash flow recovery should regulators seek to limit the impact on customer bills by delaying recovery or approving lower rate increases.”
They did offer a ray of light, which relates to regulatory oversight: If regulatory support remains firm, the utilities sector should see some semblance of stability. For now, however, the rising prices in utilities costs continue to raise the decibel level of customer complaints.
“We still think most state regulators will remain supportive, but utilities and commissions will face heightened public scrutiny amid affordability concerns,” the firm said.
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