Investors are almost unanimously convinced that there will be a federal funds interest rate cut in July. The Federal Reserve opted to keep the benchmark rate in a target range of 2.25%-2.5%, with a vote of 9-1. Comments made by Fed Chairman Jerome Powell and a tweak made to the central bank’s statement made traders increase bets on an upcoming rate cut. Powell stated during Wednesday’s address that the case for a more accommodative policy has strengthened, furthering the notion that policy makers are concerned about recent economic developments. The fed funds futures market is now signaling a 100% chance of a monetary easing policy next month.
The yield on the 10-year Treasury note, which is a benchmark for mortgage rates and corporate borrowing, fell below 2% in response to the Fed’s statements on Wednesday. According to a CNBC analysis, stocks in the energy and materials sector tend to increase in a declining rate environment, mostly due to the weakening dollar that results from the falling rates. The analysis also found that Disney DIS, Verizon VZ, and Home Depot HD have all historically performed well in low rate conditions.
According to the analysis, Disney is historically the best performing Dow stock under a low rate environment. The media giant rose 2.42% while the Dow only rose about 1% when the 10-year yield was between 2%-1.5%. The media conglomerate is currently listed as a Zacks Rank #3 (Hold). Disney has an earnings yield of 4.67% that can attract investors looking for a stock with solid returns relative to its price. Shares of DIS have been on a strong run lately; the stock’s 12-week price change is +22.26% relative to the S&P 500. Disney looks to maintain its recent 12-week success relative to its industry with the looming hope of a rate cut.
The analysis defined stocks in the communications sector as big winners as well because of their high dividend yields that become more attractive when fixed income yields fall. It also identified Verizon as the second-best performing stock in the Dow when interest rates decline. Verizon is currently sitting at a Zacks Rank #3 (Hold) with a high dividend yield of 4.2%.
Verizon also has a Style Score of B in Value, and shares are currently trading at 12X its forward earnings. It also has an earnings yield of 8.28%, assuring investors they are paying for a stock that can produce positive returns. The company has seen some recent success; earnings last quarter increased over 7% compared to the previous quarter, while Verizon’s bottom line beat the Zacks Consensus Estimate by 2.56%. With its appealing dividend and positive recent earnings growth, demand could rise for VZ if a rate cut does happen soon.
When yields drop, mortgage rates follow suit, meaning more consumers are inclined to refinance. Just last week, refinancing jumped an astounding 47% week to week and 97% annually. When homeowners have lower monthly mortgage payments, it gives them more disposable income. Homeowners often choose to use this extra money to invest in their home in other ways. For instance, customer traffic in home improvement stores like Home Depot could see an increase, helping to boost the stock.
The Home Depot is a Zacks Rank #3 (Hold) with a Style Score of B in Growth. The home improvement company has recently seen a double-digit price increase within the last 12 weeks to go along with their year-to-date price increase of 22.95%. Zacks Consensus Estimates are currently projecting positive growth in earnings and revenues all the way through fiscal 2021 for the company. Home Depot has been able to consistently surpass our growth estimates and with a looming rate cut, it seems like the company may be able to keep that trend.
The Home Depot, Inc. Price and EPS Surprise
The Home Depot, Inc. price-eps-surprise | The Home Depot, Inc. Quote
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