On Oct 30, Federal Reserve cut benchmark interest rate by a quarter basis points for the third time in a year. This happened for the first time in more than a decade. However, the third rate cut was widely expected. What is important is Fed Chair Jerome Powell’s message that the central bank will keep its monetary policy steady ---- neither rate cut nor rate hike ---- so long its outlook for the U.S. economy remains unchanged.
Fed Adopts a Stable Monetary Policy
On Oct 30, Fed reduced the benchmark lending rate by 25 basis points to the range of 1.50-1.75%. After raising interest rate for four times last year for a full 1 percentage point, Fed adopted a dovish stance since the beginning of 2019. Notably, Fed’s aggressive monetary stance was blamed as one of the major reasons for stock market disaster in 2018.
After keeping interest rate stable in the first half of 2019, Fed was compelled to reduce it in three consecutive and equal tranches of 25 basis points to sustain the expansion of the U.S. economy amid heightened trade conflict with China, global economic slowdown and slowing pace of U.S. economic growth --- particularly contraction in business spending.
However, in his latest policy statement, Powell dropped the phrase that Fed would “act as appropriate” to sustain expansion, and said instead that it “will assess the appropriate path of the target range” for fed funds. This clearly indicates the end of mid-cycle (insurance cut) monetary policy adjustment.
At the same time, the Fed Chair has also assured market participants that the central bank will not consider a rate hike until there is a sustained and significant uptick in inflation rate, which was remained muted at below 2% target rate of Fed so far in 2019.
Is This the Best Solution?
It seems that the Fed was facing a dilemma while finalizing monetary policy in its FOMC. The United States is witnessing a dichotomized syndrome in 2019. The business investment, especially the manufacturing sector is suffering owing to a tariff war with China, which raised input costs as well as reduced export demand for high-end U.S. products.
On the other hand, consumer spending remained firm and is driving the U.S. GDP. In the third quarter of 2019, the U.S. economy grew 1.9%, higher than the consensus estimate of 1.6%, primarily buoyed by strong consumer spending. Two recently released consumer-centric data --- consumer confidence and consumer sentiment --- clearly reflected most of the Americans are happy with current economic conditions.
Since, consumer spending accounts for nearly 70% of the U.S. economy against 12% weight of business spending, U.S. GDP is growing even after 10 years of expansion, albeit at a slow pace. Wall Street is also reaping benefits as the S&P 500 Index recently achieved a new all-time high, while both the Dow and the Nasdaq Composite are at striking distance from their record highs.
At this stage, adoption of a stable monetary policy was appreciated by investors as the S&P 500, the Dow and the Nasdaq Composite ----- gained 0.3%, 0.4% and 0.3%, respectively, after Fed’s decision. Within the S&P 500, rate-sensitive utilities and health care sectors surged 0.9% and 0.8%, respectively.
Our Top Picks
Given this situation, rate-sensitive investments like utilities, health care, telecom and REITs will be prudent. We narrowed down our search to five such stocks each carrying a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
The chart below shows price performance of our 5 picks in the past three months.
NRG Energy Inc. (NRG - Free Report) is engaged in the production, sale and delivery of energy and energy products and services to residential, industrial as well as commercial consumers in major competitive power markets in the United States. The company has an expected earnings growth rate of 62.7% for the current year. The Zacks Consensus Estimate for the current year has improved 1.8% over the last 60 days.
AquaVenture Holdings Ltd. (WAAS - Free Report) provides water-as-a-service solutions in North America, the Caribbean, and South America. It operates in two segments, Seven Seas Water and Quench. The company has an expected earnings growth rate of 9% for the current year. The Zacks Consensus Estimate for the current year has improved 1.4% over the last 60 days.
Addus HomeCare Corp. (ADUS - Free Report) provides personal care services to elderly, chronically ill, disabled persons, and individuals who are at risk of hospitalization or institutionalization in the United States. It operates in three segments: Personal Care, Hospice and Home Health. The company has an expected earnings growth rate of 19.4% for the current year. The Zacks Consensus Estimate for the current year has improved 0.4% over the last 60 days.
Amedisys Inc. (AMED - Free Report) provides healthcare services in the United States. It operates through three segments: Home Health, Hospice, and Personal Care. The company has an expected earnings growth rate of 13.8% for the current year. The Zacks Consensus Estimate for the current year has improved 0.5% over the last 60 days.
Bluerock Residential Growth REIT Inc. (BRG - Free Report) operates as a real estate investment trust. It acquires apartment properties in demographically attractive growth markets throughout the United States. The company has an expected earnings growth rate of 11.1% for the current year. The Zacks Consensus Estimate for the current year has improved 2.6% over the last 60 days.
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