Coronavirus seems to wreak havoc across the globe. It has also impacted the stock market and pushed bond prices to record lows. With the health scare persisting, the Federal Reserve might ease monetary policies this month to stabilize the market.
Covid-19 Weighing Heavily on the Market
The coronavirus outbreak dragged the stock market down. In fact, for the week ending Feb 28, the Dow fell 12.4%, the S&P 500 lost 11.5% and the Nasdaq shed 10.5%. The S&P 500 Index posted its worst weekly performance since the 2008 crisis.
So far, 89,219 confirmed cases of Covid-19 have been recorded globally. Fatalities have risen to 3,058. In fact, at present, countries like South Korea, Japan and Italy are closing factories with a steep rise in confirmed coronavirus cases. There has been a significant decline in tourism across the globe.
In the United States, the administration expanded existing travel restrictions on Iran, and also increased travel advisories for Italy and South Korea, especially for specific regions in those countries. Public health officials have warned there is a high chance of infection clusters and this might result in temporary quarantines and production slowdowns.
Fed Prompts Easing
On Feb 28, Federal Reserve’s Chairman Jerome Powell said in a mid-day statement that central banks are “closely monitoring developments” and analyzing their impact on the economic outlook. Powell also added that the Fed “will use (our) tools and act as appropriate to support the economy.” Stocks pared losses after the statement and helped at least one of the major benchmarks, the Nasdaq Composite to close in the positive territory.
Powell’s statement indicates possibility of an interest rate cut to combat the impact of coronavirus. COVID-19 has impacted supply chains from China and globally, and forced companies to shift facilities from mainland China.
Along with that, Powell also hinted that though “the coronavirus poses evolving risks to economic activity” the “fundamentals of the U.S. economy remain strong.” Interest rates currently are between 1.5% and 1.75%. As the disease spreads, a 50-basis point cut can be expected in March.
Additionally, Bank of Japan’s Governor Haruhiko Kuroda said that, “BOJ will monitor developments carefully, and strive to stabilise [stabilize] markets and offer sufficient liquidity via market operations and asset purchases.”
Stocks to Gain from Interest Rate Cut
When the Fed or the central bank of any country eases its monetary policy by slashing interest rates, it acts as a growth catalyst. The low rates increase personal and corporate borrowing, which leads to greater profits and a robust economy.
Consumers also spend more in a low-rate environment, as buying a new house is more affordable along with other discretionary factors like private schooling. Businesses get the opportunity to perform finance operations at a cheaper rate, which increases their future earnings potential, leading stocks to rise higher.
Lower interest rate environment boost dividend-paying sectors such as utilities and real estate investment trusts (REITs) in particular. Why? These companies have stable cash flows and strong balance sheets, which benefit from cheaper debt financing. Moreover, profit from lower interest rate help these firms to provide higher dividends, attracting investors to invest more. (Read More: 5 Stocks to Make the Most of Coronavirus Scare)
5 Stocks to Buy
Given high chances of Fed slashing interest rates in the next regular monetary-policy meeting, scheduled for Mar 18, we have shortlisted five stocks that can return well on investment. What’s more these companies sport a Zacks Rank #1 (Strong Buy) or #2 (Buy) and have a dividend yield higher than their industry group.
Our first choice is ARMOUR Residential REIT, Inc. ARR, a real estate company that invests in residential mortgage backed securities.TheZacks Consensus Estimate for its current-year earnings has risen 4.7% over the past 60 days. In fact, this Zacks Rank #1 company has a dividend yield of 11.3%, compared with the Zacks REIT and Equity Trust industry’saverage of 7.7%. You can see the complete list of today’s Zacks #1 Rank stocks here.
Next, we have AGNC Investment Corp. AGNC, a company that invests in residential mortgage pass-through securities and collateralized mortgage obligations for which the principal and interest payments are guaranteed by government-sponsored enterprise or by the United States government agency. TheZacks Consensus Estimate for its current-year earnings has been revised 8.7% upward over the past 60 days. In fact, this Zacks Rank #1 company has a dividend yield of 11.3%, compared with the Zacks REIT and Equity Trust industry’saverage of 7.7%.
Middlesex Water Company MSEX that owns and operates regulated water utility and wastewater systems.TheZacks Consensus Estimate for its current-year earnings has risen nearly 3% over the past 60 days. In fact, this Zacks Rank #2 company has a dividend yield of 1.7%, compared with the Zacks Utility - Water Supply industry’saverage of 1.6%.
Spire Inc. SR engages in the purchase, retail distribution, and sale of natural gas to residential, commercial, industrial and other end-users of natural gas.TheZacks Consensus Estimate for its current-year earnings has gained 4% over the past 60 days. In fact, this Zacks Rank #2 company has a dividend yield of 3.3%, compared with the Zacks Utility - Gas Distribution industry’saverage of 2.6%.
Lastly, we suggest, TerraForm Power, Inc. TERP that owns and operates clean power generation assets. TheZacks Consensus Estimate for its current-year earnings has gained 2.7% over the past 60 days. In fact, this Zacks Rank #2 company has a dividend yield of 4.3%, compared with the Zacks Utility - Electric Power industry’saverage of 2.8%.
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