Wall Street has been grappling with severe volatility during the last nine trading days on account of the global coronavirus outbreak. On Mar 3, the Federal Reserve opted for an unexpected 50 basis point cut to the federal fund rate in order to instill investor confidence on risky asset like equities.
Fed Cuts Federal Funds Rate
On Mar 3, in a surprising move, the Fed reduced the benchmark lending rate by 50 basis points 1-1.25% from the previous range of 1.50-1.75%. This marks the first the first unscheduled rate cut by the central bank since October 2008. Notably, the next FOMC meeting is scheduled to be held during Mar 17-18.
According to Fed Chairman Jerome Powell “The coronavirus poses evolving risks to economic activity. In light of these risks and in support of achieving its maximum employment and price stability goals, the Federal Open Market Committee decided today to lower the target range for the federal funds rate.” Powell further said, “The magnitude and persistence of the overall effect on the U.S. economy remain highly uncertain and the situation remains a fluid one.”
Higher input costs and inability of management to plan properly owing to the potential impact of the coronavirus outbreak will result in a business investment slowdown. The Fed’s rate cut will not only make cheaper funds available to businesses and stock market investors but will also make U.S. dollar cheaper in the international market, thereby, enabling the country’s exports to be more competitive.
Are More Rate Cuts in the Offing?
The Fed has not given any indication for further rate cuts anytime soon. However, a large section of market participants and industry watchers are already asking for another 50 basis point cut in benchmark rate either in this month or two cuts in March or April of a quarter percentage point each.
Following the Fed’s rate cut, President Donald Trump tweeted that the Fed “must further ease and, most importantly, come into line with other countries/competitors. We are not playing on a level field. Not fair to USA. It is finally time for the Federal Reserve to LEAD. More easing and cutting!”
Some of the Fed officials have hinted that the central bank will study more economic data (job data, ISM manufacturing and services data, industrial production data) of February to ascertain the material impact of the coronavirus outbreak on the U.S. economy. Notably, the European Central Bank, the Bank of Japan and Bank of South Korea are still holding their existing rates.
Meanwhile, the above-mentioned central banks are already pursuing either a negative or at least a zero interest rate policy. Per Deutsch Bank, currently more than $15 trillion money has been invested on sub-zero interest rate. However, the Fed has a solid buffer with existing benchmark lending rate of 1-1.25%.
Our Top Picks
Under these circumstances, rate-sensitive investments like utilities, REITs and telecom will be prudent. We narrowed down our search to five such stocks each carrying either a Zacks Rank #1 (Strong Buy) or 2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
The Chart below shows the price performance of our five picks year to date.
Duke Energy Corp. DUK operates as an energy company in the United States. It operates through three segments: Electric Utilities and Infrastructure, Gas Utilities and Infrastructure, and Commercial Renewables. The Zacks Rank #2 company has expected earnings growth rate of 2% for the current year. The Zacks Consensus Estimate for the current year has improved by 0.2% over the last 30 days.
PG&E Corp. PCG is engaged in the sale and delivery of electricity and natural gas to residential, commercial, industrial and agricultural customers in northern and central California. The Zacks Rank #2 company has expected earnings growth rate of 4.3% for the current year. The Zacks Consensus Estimate for the current year has improved by 0.7% over the last 30 days.
Telenav Inc. TNAV is a provider of location based services, or LBS, including voice guided navigation, on mobile phones. The company operates through Automotive and Mobile Navigation segments. The Zacks Rank #1 company has expected earnings growth rate of 144.7% for the current year. The Zacks Consensus Estimate for the current year has improved by 191.2% over the last 30 days.
AGNC Investment Corp. AGNC is a real estate investment trust that focuses on leveraged investments in agency MBS. The Zacks Rank #1 company has expected earnings growth rate of 4.6% for the current year. The Zacks Consensus Estimate for the current year has improved by 0.4% over the last 30 days.
Apartment Investment and Management Co. AIV is focused on the ownership and management of quality apartment communities located in select markets in the United States. The Zacks Rank #2 company has expected earnings growth rate of 7.2% for the current year. The Zacks Consensus Estimate for the current year has improved by 0.4% over the last 30 days.
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