Why Rate-Sensitive Stocks Limited the Dow's Gains Today
May 28th 2013 9:01PM
Updated May 28th 2013 11:15PM
It's not often that bullish investors are disappointed with a 106-point gain for the Dow Jones Industrials , especially one that leaves the average at an all-time record high. But with early gains that were more than double that, the triple-digit gain for the Dow was a bit of a letdown, especially in light of favorable domestic data on home prices and consumer confidence. Yet good news on the economic front has been no guarantee of stock market success, given that investors are more concerned about the timing of the exit of the Federal Reserve in its bond-buying operations and other monetary-policy machinations. On that front, bond prices plunged today, with the 10-year Treasury yield rising above 2.1% for the first time in more than a year.
Moreover, several stocks posted substantial declines. Leading the way was AT&T , which dropped 1.5%. Fool contributor Travis Hoium earlier today highlighted the threat to AT&T and rival Verizon , which also fell more than 1%, noting that initiatives from Google could eventually threaten their entire business models. However, another reason for the drops is that telecom stocks are traditionally sensitive to interest rate fluctuation, as their dependable flows of customer subscription revenue closely resemble a bond-like income stream. If bond yields keep rising, then investors will want higher dividend yields from AT&T and Verizon, and that in turn will send shares lower.
Consumer giant Procter & Gamble also fell today, posting a 1.25% decline. After soaring on Friday after news that the company had replaced its CEO with former top executive A.G. Lafley, P&G's stock might have reacted to the realization that the return of its former CEO won't necessarily vault the consumer-products company back to complete health without a substantial struggle. Lafley's main advantage is his knowledge and familiarity with the company, but P&G needs innovative products that will reestablish its leadership in the industry.
Finally, Exelon plunged 7.5% after getting downgraded by Deutsche Bank. The analyst highlighted a poor capacity auction last Friday as driving prices lower through 2016 or 2017, and with the continued pressure of low-cost natural gas for electricity production, Exelon won't be able to fully reap the benefits of the cost advantages that its nuclear power capacity often produces. Rising bond yields also take their toll on utilities, further exacerbating the declines.
Despite that troublesome long-term forecast from Deutsche Bank, many still see Exelon as being perfectly positioned to capitalize on having the largest nuclear fleet in North America. This strength, combined with an increased focus on balance sheet health and its recent merger with Constellation, places Exelon and its resized dividend on a shortlist of the top utilities. To determine if Exelon is a good long-term fit for your portfolio, you're invited to check out The Motley Fool's premium research report on the company. Simply click here now for instant access.
The article Why Rate-Sensitive Stocks Limited the Dow's Gains Today originally appeared on Fool.com.Fool contributor Dan Caplinger has no position in any stocks mentioned. You can follow him on Twitter @DanCaplinger. The Motley Fool recommends Exelon and Procter & Gamble. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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