California Relief Rally Drives Utilities Higher

The Utilities Select Sector SPDR Fund (XLU), an exchange-traded fund that tracks the sector, gained +0.8% on Tuesday, September 1 as 83.9% of its holdings moved higher. That strength was concentrated in California power companies, led by Edison International (+8.9%) and PG&E Corp (+5.9%), even though companies graded A or B account for only 28.0% of the fund's graded weight. The rally followed a decision by California lawmakers to adjourn without voting on a contested wildfire liability measure after a sharp drop in utility shares the prior session.

The legislative outcome offered immediate relief to a corner of the market that had faced severe pressure. State officials had been negotiating a package that aimed to limit utility liability and block insurance carriers from suing power companies over wildfire costs. The legislative debate stalled when the state Assembly declined to take up the compromise bill before the end of the session.

The rebound in California utilities helped lift the entire Utilities group, which rose +0.9% on a cap-weighted basis and +0.9% on an equal-weighted basis. Because both measures rose by the same amount, gains were distributed evenly across large and small power providers rather than being concentrated in a single mega-cap utility. The sector was one of the few positive spots in the market on Tuesday, September 1, when 4 of the 11 sectors rose. While nearly the entire sector advanced, losses were minimal, with American Water Works (-0.6%) marking the group's softest performance.

Tuesday's advance brought XLU to $42.57, but it comes after a difficult stretch in which the fund fell -4.0% over the past month. More importantly, the surge was led by names outside the top quality tiers, leaving the sector's underlying quality distribution unchanged.