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Coronavirus Forces Fed to Cuts Rates: Utilities in Focus

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The Federal Reserve has slashed interest rates by 50 points, lowering it to a range of 1-1.25%. Such a steep decline in the federal funds rate has been witnessed for the first time since 2008. Fear of coronavirus or COVID- 19 is making investors unsure of future economic growth and they are trying to avoid the volatile market movements, which are resulting in panic sell-offs, pulling down the indexes and wiping out gains.

Fed Chief said, ”We saw a risk to the outlook for the economy and chose to act”. The fear of unknown is forcing all customer classes to cut down on expenditures, which can have a negative impact on steady economic growth. There have been 124 confirmed cases and 9 deaths due to coronavirus in the United States.

Major indexes across the globe have lost in the past week due to huge sell-offs. The indexes recouped some of the lost ground on Monday, but again lost a substantial portion of its gain yesterday, despite the rate decline announced by the Federal Reserve. The recent meeting of G7 countries and their statement on the unprecedented situation are yet to boost investor confidence globally.

Despite measures taken to control the spread of this deadly virus, Covid -19 has already spread in nearly 76 countries across the globe, with 92,305 infected and 3,198 losing their lives. Per World Health Organization, lack of personal protective equipment (“PPE”) is endangering health workers worldwide, as they depend on PPE to protect themselves from being infected and from infecting others. At present, lack of a global concerted effort and enough PPE could cause delay in controlling the crisis and hurt investors’ confidence.

Amid turmoil in domestic and global markets, it is advisable to stay invested in domestic-focused utilities. This sector tends to benefit when the rates are down, as it helps utilities to get funds from the market at a cheaper rate and continue with infrastructure strengthening initiatives. Moreover, demand for utility services doesn’t fluctuate too much, even in weak economic conditions.  

Utilities are often considered as bond substitutes due to their steady performance and ability to pay out dividends to shareholders even in difficult economic conditions. In the past three months, Utilities have gained 1.1% against the S&P 500 group’s decline of 0.9%.  

One can consider utilities like Duke Energy Corporation DUK, Algonquin Power & Utilities Corp. (AQN - Free Report) , Avista Corporation AVA and Entergy Corporation ETR, which registered gains of 7.1%, 11.7%, 4.5% and 3%, respectively, in the past three months.

Three months Price Performance

Duke Energy, Algonquin Power & Utilities., Avista Corp. and Entergy’s Zacks Consensus Estimate for 2020 improved 1%, 4.1%, 2.9% and 0.2%, respectively, in the past 60 days. The current dividend yields of Duke Energy, Algonquin Power & Utilities., Avista Corp. and Entergy are 3.91%, 3.61%, 3.26% and 3%, respectively, better than the S&P 500 group’s 1.98%.

Duke Energy and Algonquin Power & Utilities have a Zacks Rank #2 (Buy), while Avista Corp. and Entergy carry a Zacks Rank #3 (Hold). You can see  the complete list of today's Zacks #1 Rank (Strong Buy) stocks here.

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