The Nasdaq is beating the Dow Jones Utilities index by more than 15 percentage points over the past year, which is massive – as well as unusual and perhaps unsustainable.deepblue4you/iStockPhoto / Getty Images
Here’s one way of arguing that the stock market is looking a little stretched right now: The Nasdaq Composite Index is outperforming U.S. utilities.
You might well ask: Huh?
Well, since the Nasdaq is largely composed of fast-growing tech stocks – from stalwarts such as Microsoft Corp. MSFT-Q and Google-parent Alphabet Inc. GOOGL-Q to today’s superstars such as Nvidia Corp. NVDA-Q and Palantir Technologies Inc. PLTR-Q – you might conclude that the index should consistently trounce stodgy old utilities, which are often held for their stable dividends.
Over the long term, though, the performance of the two groups of stocks is closer than you might think, which is why today’s stock market is rubbing some observers the wrong way.
Let’s look at the recent numbers.
Over the past year, the Nasdaq has gained nearly 28 per cent.
Over the same 12-month period, the Dow Jones Utilities index, which tracks 15 players including Duke Energy Corp. DUK-N and Consolidated Edison Inc. ED-N, has delivered a total return of 12.6 per cent, including dividends.
The Nasdaq is beating utilities by more than 15 percentage points, which is massive – as well as unusual and perhaps unsustainable.
Richard Bernstein Advisors, a New York-based asset manager, looked at the long-term relative performance of the two groups earlier this year.
RBA discovered that the Nasdaq has outperformed utilities by a hair’s breadth – 0.63 of a percentage point per year, as of May – on average since the Nasdaq’s founding in 1971.
These long-term performance numbers include much of the recent AI-fueled rally, which has worked in Nasdaq’s favour. They also include dividends, which have worked in favour of utilities over time.
Three ways to navigate a bubble, without selling everything
One take-away, according to RBA: Dividends can provide dazzling long-term returns, with considerably less volatility than tech stocks.
A second take-away: The Nasdaq Composite Index tends to surge ahead of utilities during speculative periods and bubbles. We may be living through one of those periods today.
A third take-away: If you’ve missed out on the current tech rally, don’t worry. Waiting it out could pay off if the speculative frenzy ends. As RBA noted, utilities outperformed the Nasdaq in the 1970s, the 1980s and the 2000s.
The lessons extend to other parts of the market as well. If U.S. utilities can keep up with the world’s greatest collection of technology stocks, a more diversified collection of dividend payers should do well, too.
And let’s not rule out Canadian dividend stalwarts, such as our own utilities and banks, which shine next to global peers.
I asked you last week what you think is going to be your safest investment for the next year.
The replies ranged from cash and bonds, through gold and silver, and on to AI-themed stocks, in the expectation that this tech rally is still in its early stages.
But the majority of responses lined up with RBA’s case for dividends – that they are the ideal solution to a speculative market.
Many of you argued in favour of banks, utilities, real estate investment trusts, independent power producers and even dividend-gushing energy producers.
They might not be as safe as cash. But as one reader put it: “It’s not hard to define what is safer. What’s hard is identifying what will perform the best.”
Here’s a non-investing question for you this week: How have you navigated the expense of car insurance when your children began driving? Asking for a friend. Send your money-saving tips, or horror stories, to dberman@globeandmail.com.
Chart of the day
The Globe and Mail