Even though the case for a rate hike strengthened, for now the Fed refrained from raising rates. The Fed will look for further evidence of continued progression toward its objectives for hiking rates including inflation touching the desired level. Not to forget that business spending was discouraging and the presidential election in November will increase gyrations in the stock market.
Thanks to such low interest rate environment, debt driven companies including utilities, telecoms and real estate investment trusts or REITs rallied the most. Low interest rates are good for such companies as it decreases their cost of capital, which will eventually boost profitability.
Fed Holds Rate
The Fed opted to keep short-term interest rates unchanged “for the time being” as they sought further evidence of economic strength. However, the Fed did mention that “near-term risks to the economic outlook appear roughly balanced”. The Fed remained worried earlier in the year mostly due to Britain’s exit from the European Union and weak economic growth in China.
Despite such upbeat assessment of the economic outlook, Fed Chairwoman Janet Yellen said that she is in no hurry to raise rates as inflation continued to run below the Fed’s target level of 2%. She also noted that business investment remains soft and wants to see further improvement in the job market. How the markets fare in the upcoming months surrounding the upcoming presidential election is also expected to play a crucial role in determining such moves (read more: 5 Stocks to Buy on a Dovish Fed Stance).
Inflation Still Below Expectations
Inflation remained below the long-term objective, partly reflecting the fall in energy prices and in prices of non-energy exports. Most of the market-based measures of inflation remains low. In fact, most survey-based measures of long-term inflation expectations are little changed.
The Fed is more concerned about the Commerce Department’s personal-consumption-expenditures price index. The gauge rose 0.8% in July from the year-ago period, while core inflation that excludes food and energy prices undershoots at 1.6%. The data will only lead to expectations that borrowing costs will probably increase at a gradual pace (read more: Fed’s Favorite Inflation Measure Remains Stuck at 1.6%).
‘Dot Plot’ Suggests Slower Rate Rise
In fact, most of the Fed officials have scaled back their expectations of a rate hike next year and over the long run, even though, the central bank’s so-called “dot plot” indicated that 14 of the 17 officials do expect a rate hike by year-end. Policy makers now see only two hikes next year, down from the June median projection of three.
Fed officials also trimmed full-year gross domestic product for this year to 1.8% from an earlier estimate of 2%. The unemployment rate, on the other hand, is expected to increase to 4.8% as compared with 4.7% in June. The headline inflation is estimated at 1.3%, down from 1.4% in the last summary of economic projections that the Fed releases each quarter.
Utility, Telecom, REITs Rise
Investors snapped up shares in utilities, telecommunications and REITs as the Fed gave a muddied view of a rate hike in the days to come. Lower interest rates mean a decrease in the cost of capital, a basic requirement of utility and telecom companies. Such companies are capital intensive since they require a continuous inflow of funds to carry out their operations and upgrade infrastructure. Lower interest rates or for that matter a decrease in the debt level will have a positive impact on their credit ratings (read more: 4 Utility Stocks to Play as Fed Keeps Rate Hike on Hold).
Debt is also an important part in real estate investing, and a hike will run counter to this plan. REITs borrow money to invest in new properties; hence a hike in rates could limit their expansion plans.
Meantime, higher interest rates will make government treasuries and other bonds more attractive compared to companies from the above-mentioned sectors, whose major attraction is dividend yields. In that case, investors will stick to government securities and not hold onto them. On Sep 21, the Utilities Select Sector SPDR ETF XLU, SPDR S&P Telecom ETF XTL and First Trust S&P REIT ETF FRI gained 2%, 1.2% and 1.3%, respectively.
5 Gainers to Buy Now
We have selected five solid stocks from the aforementioned sectors that have gained significantly on Sep 21, thanks to the Fed’s dovish stance. Even in the last six months period, such stocks have ended in the green. To top it, the stocks boast a Zacks Rank #1 (Strong buy) or 2 (Buy) and also provide dividends of over 3%.
Spark Energy, Inc. SPKE is an independent retail energy services company. The company rallied 4.2% on Sep 21, while it gained 25.8% during the last six months period. Spark Energy has a Zacks Rank #1 and provides a dividend yield of 5%.
SPARK ENERGY Dividend Yield (TTM)
SCANA Corporation is engaged in generation, transmission, distribution and sale of electricity. The company advanced 1.7% on Sep 21, while it has gained 8.3% during the last six months period. SCANA has a Zacks Rank #2 and provides a dividend yield of 3.2%.
SCANA CORP Dividend Yield (TTM)
DTE Energy Company DTE engages in the utility operations. The company increased 2.1% on Sep 21, while it gained 7.8% during the last six months period. DTE Energy has a Zacks Rank #2 and provides a dividend yield of 3.3%.You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
DTE ENERGY CO Dividend Yield (TTM)
Smiths Interconnect, a division of Smiths Group PLC SMGZY, offers electronic and radio frequency components. North America accounts for more than half of the company’s revenues. Smiths Group went up 2% on Sep 21, while it surged 12.3% during the last six months. Smiths Group has a Zacks Rank #2 and provides a dividend yield of 3.3%.
SMITHS GRP PLC Dividend Yield (TTM)
Care Capital Properties, Inc. CCP is a real estate investment trust which is engaged in the ownership, acquisition and leasing of skilled nursing facilities and healthcare assets. The company gained 1.1% on Sep 21, while it soared 11.1% over the past six months. Care Capital has a Zacks Rank #2 and provides a dividend yield of 8.1%.
CARE CAP PROPRT Dividend Yield (TTM)
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