Fed officials are now going all out to drop hints of more aggressive policy easing. New York Fed President John Williams is the latest to say that a rate cut will be a wise strategy at the first signs of an economic downturn. Meanwhile, the U.S. economy is at the brink of a slowdown, which definitely calls for rate cuts.
Needless to say, rate-sensitive stocks tend to rise in an environment when rates are declining as it eventually leads to cheaper borrowing costs. Thus, investing in real estate and utility players seems like a wise move. Gold is another lucrative investment option as its prices rise on hopes of more policy easing.
Dovish Fed Comments
Williams recently said that since the federal funds rate is near zero, the most effective strategy for the Fed is to trim rates at the slightest sign of economic distress. Williams said in a speech at a research conference in New York that “when you have only so much stimulus at your disposal, it pays to act quickly to lower rates at the first sign of economic trouble.”
Market pundits expect Williams to endorse half-point rate cut at the Fed’s next policy meeting on Jul 30-31. Traders in the fed funds futures market now see more than a 50% chance of a rate cut in July, up from 34% a day ago.
By the way, Fed Chair Jerome Powell has dropped enough hints regarding a potential rate cut later this month, and this is primarily because of two major issues. First, as Powell categorically puts it, trade-related matters remain unresolved, and second, concerns about global economic growth continue to weigh on the U.S. economy.
Powell’s statement to the House lawmakers comes at a time when President Trump is relentlessly building pressure on the Fed to cut interest rates to bolster the U.S. economy. In fact, Trump recently tweeted that he wants to appoint Judy Shelton and Christopher Waller for the Federal Reserve board. Both of them are known to have supported lower interest rates. They believe that lower interest rates and a loose monetary policy will help the economy expand in the near term.
While Shelton openly said that the federal funds rate should be around zero, Waller has completely rejected the Phillips Curve argument that as jobless rate declines, wages should improve leading to higher inflation, necessitating rise in rates.
Rate-Sensitive Stocks to Make Merry
With the Fed widely expected to not hike rates in the near future, shares of rate-sensitive utilities and real estate will certainly climb. This is because 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. Thus, 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 the construction business.
Gold Prices to Rise
Thanks to the dovish expectations, gold prices are expected to rise. This is because lower interest rates tend to make bonds and other fixed-income investments less attractive.
Money will flow out of bonds and money market funds as they can’t provide higher yields, and in turn may flow into gold. It’s worth pointing out though that the yellow metal offers no yield at all.
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).
Atlantic Power Corporation (AT - Free Report) owns and operates a fleet of power generation assets in the United States. The stock currently has a Zacks Rank #2. The Zacks Consensus Estimate for its current-year earnings has jumped more than 100% in the past 90 days. The company’s expected earnings growth rate for the current year is 50% compared with the Utility - Electric Power industry’s projected rally of 1.6%. The company has outperformed the broader industry in the past one-year period (+16.3% vs +12.2%).
American Water Works Company, Inc. (AWK - Free Report) provides water and wastewater services. The stock currently has a Zacks Rank #2. The Zacks Consensus Estimate for its current-year earnings has climbed 0.6% in the past 90 days. The company’s expected earnings growth rate for the current year is 9.1% compared with the Utility - Water Supply industry’s estimated rise of 2.4%. The company has outperformed the broader industry so far this year (+29.2% vs +28.9%).
KB Home (KBH - Free Report) operates as a homebuilding company in the United States. . The stock currently has a Zacks Rank #2. The Zacks Consensus Estimate for its current-year earnings has moved up 2.3% in the past 60 days. The company’s expected earnings growth rate for the current year is 57.3% compared with the Building Products - Home Builders industry’s expected decline of 9.8%. The company has outperformed the broader industry on a year-to-date basis (+40.3% vs +27.8%). You can see the complete list of today’s Zacks #1 Rank stocks here.
Kinross Gold Corporation (KGC - Free Report) engages in the acquisition, exploration and development of gold properties in the United States. The stock currently has a Zacks Rank #1. The Zacks Consensus Estimate for its current-year earnings has climbed 28.6% in the past 60 days. The company’s expected earnings growth rate for the current year is 80% compared with the Mining - Gold industry’s projected rally of 10.1%. The company has outperformed the broader industry over the past one-month period (+12.8% vs +7.6%).
Royal Gold, Inc. (RGLD - Free Report) acquires and manages precious metal streams, royalties, and related interests. The stock currently has a Zacks Rank #1. The Zacks Consensus Estimate for its next-quarter earnings has moved 12% up in the past 60 days. The company, which is part of the Mining - Gold industry, is expected to record earnings growth of 11.6% in the current quarter. The company has outperformed the broader industry so far this year (+37.1% vs +34.7%).
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