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Fourth Rate Hike Likely to Raise Volatility: 5 Defensive Picks

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Ahead this week’s much-awaited Fed meeting, President Trump tweeted that he found it incredible that “the Fed is even considering yet another interest rate hike.” The Fed Chair has ignored Trump’s criticism of the central bank’s monetary stance until now. But this time around, investors and analysts should be echoing the President’s views.

This is because markets have just had their worst start to December in 38 years. A rate hike at this point would not only dampen investor sentiment, which is already at a low, it could also spark volatility and endanger the real economy in the near future.

This is why it makes sense to invest in defensive stocks to protect hard-earned profits. These stocks offer slower but stable growth during periods of uncertainty. Since these also hold out the promise of higher-than-average yields, investing in defensive stocks looks like a prudent option at this point.  

Hikes Become Unlikely During Market Slump

Even if we discount Trump’s recurrent jibes at the Fed, rate hikes are historically rare when markets are undergoing tough times. If Wednesday’s much-awaited hike does take place amid current market turmoil, it would be the first such hike since 1994. The fact is that since 1980, rate hikes have always come during bullish conditions for stocks.

And this time around, the Fed has indeed taken note. Recent releases from the central bank have increasing references to “financial stability.” On the other hand, observations in inflation and employment have become scarce, per analysis from Bianco Research. Further, Fed Chair Powell has adopted a dovish tone ever since his comments in October led to the S&P 500’s sharpest monthly losses in seven years.

Fed Likely to Focus on Economy, Not Markets

However, Bank of America (BAC - Free Report) thinks market losses haven’t reached a point where the Fed will hold off from hiking rates. After all, Powell announced another rate hike right after the equity market slide of February.

This indicates that he’s far less concerned about the impact of rate hikes on markets than say Janet Yellen. Yellen famously held off further increases after her first rate hike in December 2015 led to a market correction.

But it isn’t just the approach of the two individuals which are different, economic conditions are also vastly dissimilar. The U.S. economy has sported robust growth this year, powered by a solid labor market and an increase in business investment. Steady rate hikes have become an easy choice for the Fed since it is on track to achieve its employment and inflation targets.

This is why it is unlikely that recent global headwinds and market reverses will keep the Fed away from raising rates. The most favorable outcome for investors would be for the central bank to raise rates and still adopt a dovish stance. That would mean signaling that it will reduce the pace of its future hikes.

Our Choices

The fact that markets have just suffered their worst start to December is unlikely to keep the Fed from hiking rates. This is because the central bank’s priority, the economy, is in fine fettle now, powered by a robust labor market and increasing business investment. However, a rate hike at this stage is likely to raise market volatility further. 

Investing in defensive stocks, which offer a safe and stable choice during periods of uncertainty, looks like a good option at this point. Further, they carry the promise of above-average dividend yields. We have narrowed down our search to the following stocks based on a good Zacks Rank and other relevant metrics.

Otter Tail Corporation’s (OTTR - Free Report) primary business is production, transmission, distribution and sale of electric energy.

Otter Tail’s expected earnings growth for the current year is 10.2%. The Zacks Consensus Estimate for current-year earnings has improved 2.5% over the last 30 days. The stock has a dividend yield of 9.3% and sports a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.

Pinnacle West Capital Corporation (PNW - Free Report) provides electricity services (wholesale or retail) in the state of Arizona through its subsidiaries.

Pinnacle West has a Zacks Rank #2 (Buy). The company has expected earnings growth of 2.9% for the current year. The Zacks Consensus Estimate for current-year earnings has improved 0.2% over the last 30 days. The stock has a dividend yield of 3.2%.

Duke Energy Corporation (DUK - Free Report) is a diversified energy company with a wide portfolio of domestic and international, natural gas and electric and regulated and unregulated businesses which supply, deliver and process energy in North America and select international markets.

Duke Energy has a Zacks Rank #2. The company has expected earnings growth of 3.7% for the current year. The Zacks Consensus Estimate for current-year earnings has moved up 0.9% over the last 60 days. The stock has a dividend yield of 4.1%.

Archer Daniels Midland Company (ADM - Free Report) is one of the leading food processing companies in the world.

Archer Daniels has a Zacks Rank #2. The company has expected earnings growth of 46.4% for the current year. The Zacks Consensus Estimate for current-year earnings has moved up1% over the last 30 days. The stock has a dividend yield of 3%.

Unilever PLC (UL - Free Report) is a fast-moving consumer goods company with worldwide operations.

Unilever has a Zacks Rank #2. The company has expected earnings growth of 6.3% for the current year. The Zacks Consensus Estimate for current-year earnings has moved up 1.1% over the last 60 days. The stock has a dividend yield of 3.3%.

In addition to the stocks discussed above, would you like to know about our 10 top tickers to buy and hold for the entirety of 2019?

These 10 are painstakingly handpicked from over 4,000 companies covered by the Zacks Rank. They are our primary picks poised to outperform in the year ahead. Be among the first to see the new Zacks Top 10 Stocks >>



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