Gas utility stocks ended a streak of outperformance as central bank policy and other market forces weighed on the utilities sector.
A group of nine gas utility operators selected by S&P Global Commodity Insights plunged 13.3% in the third quarter, sharply accelerating losses sustained in the prior quarter. Meanwhile, the S&P 500 fell 5.3% and the S&P 500 Utilities sector decreased 6.7% in the third quarter.
The quarterly declines plunged both the select gas utilities index and S&P 500 Utilities sector into correction territory, or a decline of 10%-20% from recent highs. Still, both indexes were outperforming the S&P 500 year-to-date through September.
The U.S. Federal Reserve's commitment to taming inflation through rate hikes dashed hopes for a change in policy and contributed to another "roller coaster quarter" for utilities, Nasdaq IR Intelligence senior analyst Massud Ghaussy told S&P Global Commodity Insights. That pushed the dollar and debt yields higher and put downward pressure on stock and bond prices alike.
"The bond vigilantes have finally returned, forcing global central banks to tighten the monetary screws in order to contain inflation, which is proving to be stubborn and spreading like wildfire," Ghaussy said in an email. "As a result, we are witnessing one of the fastest tightening cycles in modern history, the third great bond bear market of the century, and a market of twin losses [for stocks and bonds] since the beginning of the year where there are very few places to hide safely."
Utilities provided a safe haven earlier in 2022, but their outperformance has faded, even as investors remain defensive. Critically, the 10-year U.S. Treasury yield surpassed the dividend yield for the utility sector, which serves as a bond proxy, Ghaussy said. Utility stocks were also richly valued and outperforming fellow defensive sectors healthcare and consumer staples before the sell-off, Ghaussy said.
Gas utility stocks in particular were richly valued, having outperformed the broader market over the three prior quarters.
The select index's top performers in the prior quarter — Southwest Gas Holdings Inc., Northwest Natural Holding Co., UGI Corp., and Spire Inc. — posted the third quarter's largest declines.
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Southwest Gas shares tanked nearly 20% during the quarter, turning sharply lower after the company announced it would not sell its core gas utility business. Southwest Gas shares had traded higher after the company announced a strategic review in April.
One Gas Inc., New Jersey Resources Corp., Chesapeake Utilities Corp., Atmos Energy Corp. and South Jersey Industries Inc. all posted larger losses in the third quarter than during the previous quarter.
Only South Jersey Industries, bolstered throughout 2022 by its $8.1 billion buyout, outperformed the S&P 500 and remained in positive territory through the first three quarters.
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