Utilities

Image source: katsrcool, Flickr.

Just because major market benchmarks don't move much doesn't mean that parts of the market aren't volatile. Even with stocks finishing the month largely flat compared to the end of October, a couple of sectors posted fairly sizable declines in November. Let's take a closer look at why the Utilities Select Sector SPDR (NYSEMKT:XLU) and the Consumer Staples Select Sector SPDR (NYSEMKT:XLP) didn't live up to investors' expectations last month.

Utilities fear higher rates
Utilities have actually done quite well over the past several months, as gun-shy investors who got burned in the downturn in the market gravitated toward the relatively safe sector in September and October. Last month, though, those gains came to an end, and the Utilities SPDR dropped about 2% on the month.

Looking forward, the challenge that utilities face is that it's becoming increasingly likely that the Federal Reserve will finally embark on its long-awaited efforts to tighten monetary policy. Few investors expect dramatic or sudden moves, but even the psychological impact of believing that the economy is resilient enough to withstand a modest interest rate increase will make investors question whether rate-sensitive stocks can continue to enjoy the attractive profitability of the past several years. Most utilities have been smart about refinancing debt at extremely low interest rates, and that should carry them forward with healthy balance sheets for the near future. In the long run, though, utilities will have to pay down or refinance debt at higher rates, and that could spur further declines for the stocks and financial challenges that the companies will have to overcome in order to grow.

Are consumers pulling back?
The other weak area of the market was the consumer staples arena, where the Sector SPDR fell 1% in November. Most of the attention among investors about consumers came from the retail sector, where several department stores reported poor results. Yet within this ETF, a couple of other areas stood out.

First, tobacco stocks were down substantially. Many investors see the growth prospects for tobacco companies as being quite limited, leading them to treat the stocks much as they would fixed-income securities. Concerns about higher rates therefore tend to weigh on their share prices, and that scenario played out during the month as major tobacco stocks dropped 2% to 5%.

Also, CVS Health (NYSE:CVS) suffered a nearly 5% drop during the month. As its two major drugstore chain competitors work on a massive merger, CVS announced layoffs during the month, and some investors worry that stronger competition in the sector could hurt CVS' long-term prospects. Approval of the rival deal is far from assured, though, and that could help CVS overcome its problems in the future.

Just because these sector ETFs didn't perform well last month doesn't mean that they're bad choices for investors over the longer run. Nevertheless, staying abreast of changing conditions in key sectors will help you stay in touch with the economy's underlying fundamentals and make you a better all-around investor.

Dan Caplinger has no position in any stocks mentioned. The Motley Fool recommends CVS Health. 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.