The Fed has yet again trimmed its benchmark interest rate to 0% to provide support to the economy amid the coronavirus pandemic. By trimming its short-term interest rates and at the same time renewing its crisis era bond-purchasing program, the Fed aims to pump cash into the financial system, and help banks provide more loans to businesses and households.
Policy makers unanimously agreed to trim benchmark federal funds rate a full percentage point to a range of zero to 0.25%, where it hovered for several years following the 2008 financial crisis. Earlier this month, in a rare inter-meeting move, the Fed trimmed its benchmark interest rate by half a percentage point to a range of 1-1.25%.
Moreover, the Fed is renewing its quantitative easing program and said that the central bank will purchase $500 billion in Treasury bonds and $200 billion in mortgage-backed securities. Fed Chair Jerome Powell in the meantime said that “we think we have plenty of policy space left” and “plenty of powerful tools,” indicating further bond purchases if required.
The Fed mentioned that “the coronavirus outbreak has harmed communities and disrupted economic activity in many countries, including the United States and that the effects of the coronavirus will weigh on economic activity in the near-term and pose risks to the economic outlook.” The novel coronavirus that emerged around Wuhan, China, has now infected about 160,000 people worldwide, and is responsible for around 6,000 deaths.
The Fed, by the way, has encouraged big U.S. banks to use the almost $4 trillion kept aside for emergencies to lend to households and distressed firms. Those buffers are specially designed to provide additional cushion at times of financial calamities.
What Rate Cut Means for Mortgage Rates
With the coronavirus outbreak compelling the Fed to cut rates, its most likely that the mortgage rates may go down in the near term as investors continue to park money in safe haven assets like the 10-year Treasury note amid the stock market downturn. Needless to say, mortgage rates in the United States generally follow the direction of the yield on the 10-year Treasury note. And bond yields decline when prices go up.
Skeptics may say that last week mortgage rates have actually gone up. However, its primarily because of some lenders artificially increasing rates to stem an overwhelming number of people applying for home loans. But Fed’s rate cut moves will certainly reverse the course again. And lower mortgage rates will certainly boost homebuying, which bodes well for housing-related stocks.
Capital-Intensive Businesses to Gain
Shares of rate-sensitive utilities 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.
Top 5 Picks
We have, thus, selected five solid stocks from the aforesaid sectors that are poised to gain from the rate cut. These stocks flaunt a Zacks Rank #1 (Strong Buy) or 2 (Buy).
D.R. Horton, Inc. (DHI - Free Report) operates as a homebuilding company. The company has a Zacks Rank #2. The Zacks Consensus Estimate for its current-year earnings has jumped 6.9% over the past 60 days. The company’s expected earnings growth rate for the current quarter and year is 20.4% and 22.4%, respectively.
Floor & Decor Holdings, Inc. (FND - Free Report) operates as a multi-channel specialty retailer of hard surface flooring and related accessories. The company has a Zacks Rank #1. The Zacks Consensus Estimate for its current-year earnings has moved up 4.5% over the past 60 days. The company’s expected earnings growth rate for the current quarter and year is 13.8% and 21.7%, respectively.
Installed Building Products, Inc. (IBP - Free Report) engages in the installation of insulation, waterproofing, fireproofing, garage doors, rain gutters, window blinds, shower doors and other products. The company has a Zacks Rank #1. The Zacks Consensus Estimate for its current-year earnings has risen 5.6% over the past 60 days. The company’s expected earnings growth rate for the current quarter and year is 31.4% and 19.5%, respectively. You can see the complete list of today’s Zacks #1 Rank stocks here.
Sempra Energy (SRE - Free Report) develops, and operates energy infrastructure. The company has a Zacks Rank #2. The Zacks Consensus Estimate for its current-year earnings has climbed 3% over the past 60 days. The company’s expected earnings growth rate for the next quarter and current year is 15.5% and 5.2%, respectively.
MYR Group Inc. (MYRG - Free Report) provides electrical construction services. The company has a Zacks Rank #2. The Zacks Consensus Estimate for its current-year earnings has moved 4.2% north over the past 60 days. The company’s expected earnings growth rate for the current quarter and year is 20.5% and 20.4%, respectively.
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