The Fed has, yet again, pledged to support economic recovery by setting a higher bar to hike interest rates. Fed officials expect to leave interest rates near zero until the end of 2023, and will continue to bear periods of higher inflation as they strive harder to revive the labor market and economy.
The Fed categorically mentioned that interest rates won’t be increased until two major things happen: the labor market returns to maximum employment, and inflation picks up to 2% and remains on track to slightly increase to more than 2% for some time. But these two new economic conditions aren’t happening soon and investors can easily get used to low rates in the near future.
Nonetheless, almost all the Fed officials who participated in the two-day policy meeting on Sep 16 said that they expect to keep rates near zero at least through next year, while 13 of them projected that rates would stay at such an ultra-low level through 2023.
However, two Fed officials, Robert S. Kaplan from the Federal Reserve Bank of Dallas and Neel Kashkari from the Minneapolis Fed, showed dissent to the Fed’s guidance. While Kaplan wanted greater flexibility in future rate setting, Kashkari wanted the committee “to indicate that it expects to maintain the current target range until core inflation has reached 2 percent on a sustained basis.” But Fed Chair Jerome Powell did confirm that the dissents were signs of a healthy debate.
The Fed, in the meantime, said that the path of economic recovery will depend on the course of the coronavirus pandemic, and the Fed has kept its benchmark short-term interest rate near zero to revive the economy in such trying times. The Fed’s statement, in fact, largely mirrors the version released in July that the pandemic “poses considerable risks to the economic outlook over the medium term.”
Nevertheless, the Fed’s attempt to keep interest rates at low levels to bolster the U.S. economy can actually boost returns of various sectors. Let us, thus, look at who stands to benefit.
Mortgage Rates to Stay Low: Boon for Home Builders
With the pandemic wreaking havoc on the economy, the Fed had to maintain a dovish stance. This will most likely push the mortgage rates to stay low in the near term as investors continue to park their money in safe-haven assets like the 10-year Treasury note amid the economic slowdown.
Needless to say, mortgage rates in the United States generally follow the direction of the yield on the 10-year Treasury note. And bond yields decline when prices go up. In fact, the 30-year mortgage rate now has slipped to a new low as the Fed has vowed to keep rates down. And lower mortgage rates will certainly boost homebuying, which bodes well for home builders.
Rate-Sensitive Utilities to Gain
Shares of rate-sensitive utilities will certainly climb. This is because utilities are capital-intensive businesses and the funds generated from internal sources are not always sufficient to meet requirements. Consequently, these companies have high levels of debt. Thus, low interest rates will help them pay off debts and book profits.
However, higher interest rates along with an increase in the debt level, for that matter a steep debt/equity ratio, will impact the credit ratings of these utility operators. If credit ratings go down, a company will find it difficult to borrow funds from the markets at reasonable rates, leading to a rise in its cost of operations.
Healthcare & Consumer Staples Have Better Track Records
A low-interest environment generally indicates that the economy has hit a soft patch. In such a scenario, healthcare stocks that are predominantly defensive in nature tend to have consistent revenues and provide comparatively high dividends.
By the way, in a low-interest environment, the cost of debt such as credit cards and mortgages are lower, freeing up income to spend on consumable items. Thus, consumer staple stocks also benefit immensely.
Gold mining stocks also have a fair chance to gain. Thanks to the dovish expectations, gold prices are expected to rise as lower interest rates tend to make bonds and other fixed-income investments less attractive.
In fact, gold prices jumped for the third straight session on Sep 16 after the Fed’s policy statement, which is likely to prove bullish for the yellow metal in the long run.
5 Top Picks
We have, thus, selected five solid stocks from the aforesaid areas that are poised to gain from the Fed’s holding of interest rates at an all-time low. These stocks flaunt a Zacks Rank #1 (Strong Buy) or 2 (Buy).
(PHM - Free Report
) primarily engages in the homebuilding business in the United States. The company currently has a Zacks Rank #1. The Zacks Consensus Estimate for its current-year earnings has risen 43.9% over the past 60 days. The company’s expected earnings growth rate for the current year is 22.1%.
MYR Group, Inc.
(MYRG - Free Report
) is a holding company of leading specialty contractors serving the electrical infrastructure market throughout the United States. The company currently has a Zacks Rank #2. The Zacks Consensus Estimate for its current-year earnings has risen 14.7% over the past 60 days. The company’s expected earnings growth rate for the current year is 24.3%.
Grocery Outlet Holding Corp
. (GO - Free Report
) is a high-growth, extreme value retailer of quality, name-brand consumables and fresh products that are sold through a network of independently owned and operated stores. The company currently has a Zacks Rank #1. The Zacks Consensus Estimate for its current-year earnings has risen 22% over the past 60 days. The company’s expected earnings growth rate for the current year is 54.4%.
Barrick Gold Corporation
(GOLD - Free Report
) engages in the exploration, mine development, production, and sale of gold and copper properties. It has ownership interests in producing gold mines that are located in the United States. The company currently has a Zacks Rank #1. The Zacks Consensus Estimate for its current-year earnings has risen 9.5% over the past 60 days. The company’s expected earnings growth rate for the current year is 80.4%.
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