CEG - 6 Stocks I'm Buying The First Week Of April
2024-03-30 08:30:00 ET
Summary
- Real estate and utilities sectors are experiencing a rally coinciding with a drop in the 10-year Treasury rate.
- REITs and utilities are often treated as bond proxies, but they have the potential for growth even in a high-interest rate environment.
- The market's lack of nuance and passive ownership of REITs may be contributing to the undervaluation of the sector.
- There is another similarity between today and the Dot Com bubble euphoria era: household allocations to stocks.
- I explain why I'm bullish on almost all types of energy, including both fossil fuels and renewables. It's not an either/or proposition.
Welcome back to my weekly variety show!
Two of my favorite sectors of the stock market are enjoying a nice rally over the last few days. Those two sectors are Real Estate ( VNQ ) and Utilities ( XLU ). (Yes, I know -- REITs and utilities. I'm really popular at cocktail parties.)
This mini-rally has coincided with a drop in the 10-year Treasury rate from its recent high of 4.34% to today's level of 4.2%.
Well-capitalized, investment grade REITs and utilities are definitely able to grow bottom-line earnings when higher interest rates are a headwind. Despite this, the market still treats these sectors as not much more than bond proxies. When rates rise, bond proxy prices fall. When rates fall, bond proxy prices rise.
Why is the market so blockheaded and lacking in nuance here?
Well, as the ever percipient Dane Bowler recently pointed out , REITs have among the highest level of passive ownership via funds like VNQ. And as Jussi Askola and I explained in " $6 Trillion In Dry Powder Waits To Fuel The Rally In REITs ," the historical pattern has been that funds flow out of REITs and into money market funds when the Fed Funds Rate is high, and the reverse happens when the FFR is low. Thus, I would expect all REITs (and utilities, to a lesser degree) to enjoy a sustained tailwind from MMF outflows in the years following Fed rate cuts....
6 Stocks I'm Buying The First Week Of April