The Sector to Avoid Ahead of the Election

One week from today, U.S. voters will head to the polls to elect the next president. Historically, while the Dow Jones Industrial Average (DJIA) tends to perform better than usual heading into the election, one sector tends to underperform -- and quite dramatically: utilities. Below, we'll take a look at historical Dow performance, as well as the 25 worst stocks to own in the week ahead of the election.

According to Schaeffer's Senior Quantitative Analyst Rocky White, the Dow averages a one-week pre-election return of 1.53%, going back to 1900 (using calendar days, and excluding 1914, when the market was closed for WWI). Further, the blue-chip index has been positive more than three-quarters of the time, with the average negative return just -0.41%. The week tends to be less volatile than usual, too, with a standard deviation of 1.87%. (However, buyers may want to wait before jumping on this pair of historical November blue-chip duds.)

For comparison, in these same weeks during non-election years, the Dow has averaged a gain of 1.05%, and has been positive 65.1% of the time. The average negative return is steeper in non-election years, at -1.49%, and standard deviation is higher at 2.69%. It's also worth noting that the week after the second Tuesday of November tends to be pretty ho-hum for the DJIA, election or not. In election years, the index averages a gain of just 0.08%, but that's still better than an anytime loss of 0.26%.

The Dow's outperformance ahead of elections makes the underperformance of utilities all the more interesting. Below are the 25 worst historical performers in the week leading up to a presidential election, going back to 2000 (four elections, based on calendar days). They're sorted by percent positive, and then average return. As you can see, "Utility Electric" and "Utility Gas" stocks account for 15 of those stocks, and seven of the eight stocks that have been positive 0% of the time during these weeks. 

Pennsylvania-based gas-and-electric concern PPL Corp (NYSE:PPL) leads the pack, averaging a steep loss of 3.77%. Not far behind is Atlanta-based Southern Company (NYSE:SO) -- a provider of power to the Southeast -- followed by New Jersey-based natural gas and electric distributor Public Service Enterprise Group Inc. (NYSE:PEG), with average pre-election losses of 2.97% and 2.9%, respectively.

So, why is this sector hit so hard? It's speculative, but some say fears of new and possibly unfavorable energy regulation. This year, for instance, candidate Hillary Clinton has vowed to "generate enough renewable energy to power every home in America, with half a billion solar panels installed by the end of [her] first term." Meanwhile, opponent Donald Trump's vision includes unleashing "America's $50 trillion in untapped shale, oil, and natural gas reserves," and encouraging "the use of natural gas and other American energy resources that will both reduce emissions but also reduce the price of energy."

On the charts, the Utilities SPDR ETF (XLU) has been in a long-term uptrend since March 2009, atop support from its 12-month moving average, and with more pullbacks contained by its 24-month trendline. Since hitting an annual low near $41 in September 2015, the exchange-traded fund (ETF) has muscled roughly 19% higher, and is attempting to find a foothold in the $48-$50 area -- a region that capped XLU's momentum in late 2014 and early 2015, and is roughly double the March 2009 close.

Over the past year, the XLU has outperformed many of its market peers, adding about 11.3%. In 2016, the ETF is up roughly 12.6%. Today, however, XLU is among the worst ETFs, and PPL is in the red after earnings. PEG and SO, meanwhile, have given up most of yesterday's earnings-related gains, with help from a round of price-target cuts from analysts. Whether this downside continues through election day, as it has in the recent past, remains to be seen.

Chart courtesy of iViewMarkets.com

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