Q&A With Gordon Pape: Why REITs and Utility Stocks Haven’t Done Well Lately

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Gordon Pape explains to a reader why REITs and Utility stocks have slumped recently.

Q – Recently REITs and utility stocks have not performed well. I’d like to understand why this has happened.

What is the relation between the interest rates and their impact on stocks such as banks, insurers, REITs, and utilities.

What sectors are going to be the most hurt when interest rates start going
up again? And what sectors will benefit?

A – REITs and utilities are interest-sensitive securities. That means the
market price will tend to rise as interest rates fall, and vice-versa. We
saw this in 2019 when we experienced a big jump in the prices of those sectors after the U.S. Federal Reserve Board put rates on hold and then
cut three times. As prices rose, yields on those securities dropped.

Recently, the Fed has signalled that no further rate cuts are contemplated
in the near future so prices have pulled back somewhat. I would not be too concerned about these price movements. These securities are normally held for income purposes. As long as the company is sound and is maintaining or raising its dividends, don’t worry about price fluctuations.

When interest rates rise, it’s a signal of a strong economy so economically-sensitive stocks will perform well. These would include railroads, airlines, manufacturing, and resource stocks. – G.P.

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