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Fed to Go Easy With Rate Hikes in 2019: Top 5 Gainers

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Fed Chair Jerome Powell affirmed that the central bank isn’t in a rush to tighten rates aggressively this year. The Fed will continue to remain patient in raising rates this year amid signs of a weakening global economy and inflation concerns remaining largely muted.

A slower rise in interest rates boosted rate-sensitive sectors. Consequently, following the Fed's latest decision, investing in real estate and utility players seems a judicious move.

Fed to Slow Down Rate Hikes This Year

During an appearance at the Economic Club of Washington, D.C., Powell confirmed that the central bank won’t be hasty in hiking rates this year. The minutes of the Fed’s December meeting had also indicated that the Fed officials agreed to remain patient in raising rates this year after global growth worries gripped equity markets in recent times.

Powell said that “we are in a place where we can be patient and flexible and wait and see what does evolve.” He added that the “principal worry I would have is global growth and that the question would be how much does that affect us.”

Needless to say that China’s economy is in doldrums, and the tariff war between the United States and China is doing no good to the global economy either. At the same time, the Trump administration and the congressional Democrats haven’t been able to move toward a resolution of the government shutdown, which has resulted in significant market gyrations.

Investors, by the way, are also wading through a series of lackluster holiday sales reports from retailers coupled with weak economic data out of Asia and Europe, which are tell-tale signs that the global economic growth is fading.

The Fed remained non-committed to set courses of rate increases in the upcoming months, especially with inflation remaining muted. All these dovish messages helped alleviate investors’ apprehensions. After all, accommodative monetary policy helped the broader stock market gain traction for a pretty long time.

Fed officials last month had hiked federal funds rate by quarter percentage point to a range between 2.25% and 2.50% and penciled in two more rate hikes this year, assuming that the economy will expand at a steady clip.

Rate-Sensitive Stocks Cheer Fed’s Flexible Rate Outlook

With the Fed reassuring investors that the central bank won't be too aggressive in hiking rates, shares of rate-sensitive utilities and real estate scaled north. Both the Utilities Select Sector SPDR ETF (XLU) and Real Estate Select Sector SPDR (XLRE) were top-performing sectors on Jan 10, raking in 1.4% and 1.6%, respectively.

Utilities are capital-intensive businesses and the funds generated from internal sources are not always sufficient to meet their requirements. Consequently, these companies have high levels of debt. 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, impact the credit ratings of these utility operators. If the credit ratings go down, a company will find it difficult to borrow funds from the markets at reasonable rates, leading to a rise in cost of operations.

Rate hikes are also a dampener to real estate activities. After all, higher interest rates will increase borrowing costs for projects, which will significantly affect companies predominantly involved in construction business.

Top 5 Winners

We have, thus, selected five solid stocks from the aforesaid sectors that are poised to gain from decelerated hikes in the near term. These stocks flaunt a Zacks Rank #1 (Strong Buy) or 2 (Buy).

NextEra Energy, Inc. (NEE - Free Report) generates, transmits, distributes, and sells electric power to retail and wholesale customers in North America. The stock currently has a Zacks Rank #2. The Zacks Consensus Estimate for current-year earnings has advanced 0.1% in the past 60 days. The company’s expected earnings growth rate for the current quarter and year are 23.2% and 15.9%, respectively.

Otter Tail Corporation (OTTR - Free Report) engages in electric, manufacturing, and plastics businesses in the United States. The stock currently has a Zacks Rank #2. The Zacks Consensus Estimate for current-year earnings has advanced 2.5% in the past 60 days. The company’s expected earnings growth rate for the current year is 10.2%.

Ameren Corporation (AEE - Free Report) operates as a public utility holding company in the United States. The stock currently has a Zacks Rank #2. The Zacks Consensus Estimate for current-year earnings has advanced 0.9% in the past 60 days. The company’s expected earnings growth rate for the current year is 20.1%. You can see the complete list of today’s Zacks #1 Rank stocks here.

KBR, Inc.’s (KBR - Free Report) engineering & construction segment offers engineering, procurement, and construction (EPC) solutions. The stock currently has a Zacks Rank #1. The Zacks Consensus Estimate for current-year earnings has advanced 1.3% in the past 60 days. The company’s expected earnings growth rate for the current quarter is 32.1%.

Great Lakes Dredge & Dock Corporation’s (GLDD - Free Report) environmental & infrastructure segment provides environmental and geotechnical construction services. The stock currently has a Zacks Rank #2. The Zacks Consensus Estimate for current-year earnings has advanced 3% in the past 90 days. The company’s expected earnings growth rate for the current quarter and year are 108.3% and 111.1%, respectively.

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