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Fed Raises Economic Outlook: 5 Terrific Top-Ranked Picks

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On Sep 26, Fed Chairman Jerome Powell raised the benchmark lending rate by a quarter point following the Federal Open Market Committee’s (“FOMC”) latest policy meeting. Notably, this was the third rate hike this year. Further, the central bank has hinted at another rate hike this year and three more in 2019.

The Fed has raised the economic outlook for 2018 and provided robust estimates of several key economic metrics. A set of stimulative policies led by massive tax cuts, a robust labor market operating near full employment and accommodative financial measures have augmented consumer and business confidence.

Consequently, the booming economic picture persuaded the central bank to raise the benchmark lending rate by 0.25%. At this stage, it will be a prudent move to invest in stocks exhibiting strong earnings momentum and carrying a favorable Zacks Rank.

Fed Raises GDP Estimates

The Fed raised forecast for 2018 and 2019 GDP growth from the 2.8% and 2.4% stated in June to 3.1% and 2.5%, respectively. However, GDP estimate for 2020 remain unchanged at 2% and Fed’s first projection for 2021 is pegged at 1.8%, indicating a slowdown.

In the first half of 2018, the U.S. economy grew 3.1% on an average per month. Fed’s new estimate also indicates that economic growth will remain stable throughout this year. The primary catalyst behind these positive revisions is the direct impact of tax cuts.

Robust Labor Market

On Sep 7, the Department of Labor reported that the U.S. economy added 201,000 jobs in August while unemployment rate remains at 3.9%, its lowest level in 18-year. Although the Fed raised its unemployment rate projection for 2018 from 3.6% to 3.7%, it is still lower than the current rate of 3.9%.

Projections for 2019 and 2020 remained unchanged at 3.5% while the first estimate for unemployment rate in 2021 is pegged at 3.7%. This indicates that the U.S. labor market will maintain near full employment levels over 2018-2021.

Inflation Under Control

The Fed has kept its 2018 PCE (personal consumption expenditure) inflation projection unchanged at 2.1%. The core PCE inflation (excluding food and energy) --the key inflation measurement tool and the central bank’s preferred inflation barometer – also remained steady at 2%.

Inflation rate for 2019 was in fact lowered by Fed from 2.1% in June to 2% while 2020 inflation rate projection remained static at 2.1%.  The first estimate for inflation rate for 2021 is also pegged at 2.1%.

Our Top Picks

Solid macro-economic fundamentals, government’s tax reform and deregulation policies are major tailwinds for the U.S. economy. Such factors are unlikely to disappear in the near term. At this stage, investment in stocks with strong earnings momentum will be lucrative. However, picking winning stocks can be a difficult task.

This is where our VGM score comes in. Here V stands for Value, G for Growth and M for Momentum and the score is a weighted combination of these three scores. Such a score allows you to eliminate the negative aspects of stocks and select winners. However, it is important to keep in mind that each Style Score will carry a different weight while arriving at a VGM Score.

We have narrowed down our search to five stocks, each of which has a Zacks Rank #1 (Strong Buy) and a VGM Score A. You can see the complete list of today’s Zacks #1 Rank stocks here

The chart below shows price performance of our five picks in the last three months.

On Deck Capital Inc. (ONDK - Free Report) operates as an on-line platform that Utilizes big data, analytic model to source, underwrite, and fund loans to small businesses. The company has expected earnings growth of 4,200% for current year. The Zacks Consensus Estimate for the current year has improved by 4.9% over the last 30 days.

Guess? Inc. (GES - Free Report) designs, market, distribute and license world's leading lifestyle collections of contemporary apparel and accessories for men, women and children. The company has expected earnings growth of 48.6% for current year. The Zacks Consensus Estimate for the current year has improved by 3% over the last 30 days.

Titan Machinery Inc. (TITN - Free Report) operates a diversified mix of agricultural, construction and consumer products dealerships located in the upper Midwest. The company has expected earnings growth of 625% for current year. The Zacks Consensus Estimate for the current year has improved by 46.5% over the last 30 days.

Tilly’s Inc. (TLYS - Free Report) is a specialty retailer in the action sports industry selling clothing, shoes and accessories. The company has expected earnings growth of 38.5% for current year. The Zacks Consensus Estimate for the current year has improved by 11.1% over the last 30 days.

Nucor Corp. (NUE - Free Report) manufactures and sells steel and steel products in the United States and internationally. The company has expected earnings growth of 123.4% for current year. The Zacks Consensus Estimate for the current year has improved by 1.3% over the last 30 days.

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