On Nov 22, President Joe Biden renominated incumbent Fed Chairman Jerome Powell for a second term. Market participants have appreciated the President’s decision as it seems that the White House also wants the central bank to continue its relatively accommodative and moderately hawkish monetary policies. This is because the U.S. economy is suffering from mounting inflationary pressure as the pandemic continues.
The renomination of Powell as Fed Chair is likely to remove uncertainties in investors’ minds regarding the central bank’s approach to balance price stability, full employment and economic growth. This will pave the way for the market’s northward journey. We have selected five stocks that are likely to benefit from the continuation of the ongoing monetary policies. These are
Dow Inc. ( DOW Quick Quote DOW - Free Report) , Avis Budget Group Inc. ( CAR Quick Quote CAR - Free Report) , Phillips 66 ( PSX Quick Quote PSX - Free Report) , Westlake Chemical Corp. ( WLK Quick Quote WLK - Free Report) and Builders FirstSource Inc. ( BLDR Quick Quote BLDR - Free Report) . Fed Remains Dovish Despite Tapering
On Nov 3, Powell said in his post-FOMC meeting statement that the Fed would start reducing its existing $120 billion per month bond-buy program ($80 billion Treasury Note and $40 billion mortgage-backed securities) effective this month.
However, despite adopting the first major shift from the ultra-dovish monetary policies that it initiated in March 2020, the overall tone of Powell’s statement sounded dovish as he categorically delinked bond-buy tapering from the future interest rate hike.
The Fed decided to reduce its existing bond-buy program by $15 billion per month ($10 billion Treasury Note and $5 billion mortgage-backed securities) per month. At this rate, the quantitative easing program will terminate in June 2022. The gradual elimination of the monetary stimulus is a calculated move by the central bank to avoid a 2013 like taper tantrum.
Having initiated the tapering, the Fed chair said “Our decision today to begin tapering our asset purchase does not imply any direct signal regarding our interest rate policy. We continue to articulate a different and more stringent test for the economic conditions that would need to be met before raising the federal funds rate.”
Accommodative Monetary Stances to Continue
The renomination of Powell as Fed Chair and the selection of Fed Governor Lael Brainard as vice-chair of the board of governors indicate that the White House wants the central bank to take a gradual approach using its policy tools and variables to stabilize soaring prices.
Both Powell and Brainard are known for their relative dovish approach toward monetary policies. Powell is highly appreciated by market participants for his timely intervention by reducing the Fed funds rate to nearly zero level and initiating a massive $120 billion per month of bond-buy program in order to maintain sufficient liquidity in the economy to cope with the pandemic-led unprecedented economic devastations.
On Nov 3, despite initiating tapering of the quantitative easing program, Powell only slightly adjusted the Fed’s view on inflation from “transitory” to “expected to be transitory.” This clearly implies that the central bank is in no hurry to hike the benchmark interest rate from the current range of 0-0.25%. He also said that the Fed is ready to adjust the pace of tapering “if warranted by changes in the economic outlook.”
The Fed has maintained that a rate hike is unlikely before the second half of 2022. Moreover, the appointment of Powell and Brainard as the two most powerful heads of the Fed signaled that the first rate hike may be delayed till late 2022.
Our Top Picks
Several good stocks are available for investment for the rest of this year. However, we have applied our
VGM Style Score to narrow the search to the five stocks mentioned above. These stocks have strong growth potential for the rest of 2021 and have seen solid earnings estimate revisions within the past 30 days. Each of our picks sports a Zacks Rank #1 (Strong Buy) and has a VGM Score of A. You can see . the complete list of today’s Zacks #1 Rank stocks here
The chart below shows the price performance of our five picks in the past three months.
Image Source: Zacks Investment Research Dow should gain from cost synergy savings and productivity initiatives. Dow is focused on maintaining cost and operational discipline through cost synergy and stranded cost-removal initiatives. Actions to reduce operating costs are expected to lend support to DOW earnings in 2021.
Dow’s restructuring program is also expected to deliver margin benefits. Investment in high-return projects should also be accretive to its earnings. Management is investing in several high-return growth projects including the expansion of downstream silicones capacity.
DOW has an expected earnings growth rate of more than 100% for the current-year. The Zacks Consensus Estimate for current-year earnings has improved 5.7% over the past 30 days.
Avis Budget Group provides car and truck rentals, car sharing, and ancillary services to businesses and consumers. The ability of Avis Budget Group to cater to a wide range of mobility demands helps it expand and strengthen its global foothold through organic growth.
Avis Budget Group operates through distinct global brands that focus on different market segments and complement other brands in their respective regional markets. Fleet expansion and technology enhancement efforts by CAR are likely to enhance its offerings.
Avis Budget Group has an expected earnings growth rate of more than 100% for the current year. The Zacks Consensus Estimate for current-year earnings improved has 0.8% over the past seven days.
Phillips 66 is the leading player in each of its operations like refining, chemicals and midstream in terms of size, efficiency and strength. The company is a leader in the midstream business, which generates stable fee-based revenues. Phillips 66, is well-positioned for making massive profits from higher demand for distillate fuels.
Contributions from the olefins and polyolefins business, backed by high demand, continue to drive PSX’s chemicals segment. Phillips 66’s move of expanding its footprint in the battery supply chain through NOVONIX investment is praiseworthy.
Phillips 66 has an expected earnings growth rate of more than 100% for the current year. The Zacks Consensus Estimate for current-year earnings has improved 48% over the past 30 days.
Builders FirstSource manufactures and supplies building materials, manufactured components, and construction services to professional homebuilders, sub-contractors, remodelers, and consumers in the United States. Builders FirstSource operates through four segments: Northeast, Southeast, South and West.
Builders FirstSource benefits from its focus on cost synergies, strategic acquisition, and robust demand arising from solid housing and repair & remodeling activities. BLDR continues to focus on investing in innovations and enhancing digital solutions for its customers.
Builders FirstSource has an expected earnings growth rate of more than 100% for the current year. The Zacks Consensus Estimate for current-year earnings has improved 31.1% over the past 30 days.
Westlake Chemical is benefiting from synergies from the Axiall acquisition. The buyout has diversified its product portfolio and geographical operations. The NAKAN acquisition has also allowed Westlake Chemical to boost its compounding business globally. Further, Westlake Chemical sees favorable demand trends for polyethylene and polyvinyl chloride resin.
Strong demand in the polyethylene business is likely to continue, especially in food packaging. Also, rising housing starts in the United States augur well for WLK’s downstream vinyl products business and domestic demand for PVC. Westlake Chemical should also benefit from its capacity expansion projects.
Westlake Chemical has an expected earnings growth rate of more than 100% for the current year. The Zacks Consensus Estimate for current-year earnings has improved 11.6% over the past 30 days.