Final answer:
Utility stocks are often affected by the interest-rate cycle due to their high levels of debt and dividend yields that compete with bond yields. These stocks can become more or less attractive based on the direction of interest rates, influencing their market prices during different economic conditions.
Step-by-step explanation:
The market price of utility stocks is often affected by swings in the interest-rate cycle. Utilities are a type of stock that can be particularly sensitive to changes in interest rates because they often carry a significant amount of debt and their dividends are compared to bond yields by investors. As interest rates rise, the cost of borrowing increases for companies carrying debt, reducing profitability and making their stocks less attractive. Moreover, higher interest rates can lead investors to prefer bonds over stocks, as bonds become more competitive with the dividend yields that utilities offer. Conversely, when interest rates decline, utility stocks often become more attractive due to their comparatively high dividend yields and the lower cost of servicing debt.
During bear markets, when stock prices remain stagnant or decrease, investors may find utility stocks appealing due to their typically stable earnings and dividends. However, in scenarios where the stock market crashes, even utility stocks may face downward pressure. Major stock market indices such as the Dow Jones Industrial Average, the Standard & Poor's 500, and the Wilshire 5000 track the performance of a variety of stocks, including utility stocks, reflecting how these companies are affected collectively by broader economic trends and monetary policies set by central banks.