Market pundits mostly expect the Fed to trim rates yet again by a quarter-point during its Oct 29-30 meeting. Slowdown in global economic growth, trade-related concerns and a string of disappointing economic data are cited as the reasons for the Fed’s expected dovish stance.
In such a scenario, utility, real estate, telecommunications and gold mining companies are poised to gain the most.
Dismal Global Growth Outlook
The IMF lowered its projections for 2019 GDP growth to 3% in October from 3.2% in July, according to the latest World Economic Outlook published earlier this month. Global trade uncertainty was cited as the chief obstacle to global economic growth.
In fact, the report also points toward the fact that the ongoing U.S.-China trade war has led to direct costs, market turbulence, and decline in investment and reduced productivity because of disruptions in supply chain.
In addition, geopolitical tensions related to Brexit could possibly reduce economic activity and hinder a likely moderate recovery in emerging markets and the eurozone.
Disappointing Economic Data
Apart from the pessimistic view of IMF toward global growth, certain domestic economic data have also been anything but encouraging.
First, the U.S. manufacturing sector contracted in September, with the U.S. manufacturing purchasing managers’ index from the Institute for Supply Management coming in at 47.8%. This is the lowest reading since June 2009. In addition, new orders for manufactured durable goods in September also declined 1.1% to $248.2 billion, according to the U.S. Census Bureau.
Second, consumers are also growing less confident about the economy. This was reflected in the Conference Board’s Consumer Confidence Index, which declined in September (125.1) after suffering a slight contraction in August (134.2). U.S. retail sales, also dropped for the first time in seven months, shedding 0.3% in September as households cut back their spending on building materials, motor vehicles, hobbies and online shopping.
September’s drop in retail sales compelled economists to lower their third-quarter consumer spending growth estimates to an about 2.5% annualized rate from 3%. Finally, sales of new single???family houses also declined 0.7% in September from the revised August rate to reach a seasonally adjusted annual rate of 701,000. Sales of existing single-family homes also declined 2.2% last month.
All these factors make the case stronger for a third rate cut by the central bank in 2019.
Possibility of a Rate Cut in October
In fact, the CME’s Fedwatchtool, which indicates the probability of FOMC rate moves in the upcoming meetings, recently showed that about 93.5% of investors are now expecting another rate cut at the FOMC’s meeting scheduled next week. This could put the Fed rate in the range of 1.50% to 1.75%.
Finally, Goldman Sachs also sees a 95% possibility of a quarter-point reduction in Fed rates at the upcoming FOMC meeting. The bank largely cited fears over a global growth slowdown and trade tariffs. Sluggish inflation was mentioned by the bank too, which was well below the Fed’s target of 2%.
The current Fed rates are in the range of 1.75% to 2.00%.
We have, therefore, chosen four stocks from sectors such as utility, real estate, telecommunications and gold mining. The stocks carry a Zacks Rank #1 (Strong Buy) or 2 (Buy).
The reason behind this selection is the fact that capital-intensive, high-dividend yieldìng sectors such as utility and real estate have huge infrastructure which requires constant maintenance and significant expenditure.
A low interest-rate environment reduces borrowing costs for these companies, which could improve their efficiency and in turn boost their profit margins. Telecommunications is also a capital-intensive sector.
In addition, investment in gold mining stocks could yield greater returns as well. This is because Fed’s easing policy and rising concerns over uncertainty in trade and economy may drive demand for safe havens like gold.
Kinross Gold Corporation KGC acquires, explores and develops gold properties. The company carries a Zacks Rank #1. The Zacks Consensus Estimate for its current-year earnings has risen 19.2% over the past 60 days. You can see the complete list of today’s Zacks #1 Rank stocks here.
KB Home KBH is a homebuilding company. The company carries a Zacks Rank #1. The Zacks Consensus Estimate for its current-year earnings has risen 6.3% over the past 60 days.
The Southern Company SO generates and distributes electricity. The company carries a Zacks Rank #1. The Zacks Consensus Estimate for its current-year earnings has risen 1.3% over the past 60 days.
Verizon Communications Inc. VZ is a provider of communications, information, and entertainment products and services. The company carries a Zacks Rank #2. The Zacks Consensus Estimate for its current-year earnings has risen 1.3% over the past 90 days.
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Southern Company (The) (SO) : Free Stock Analysis Report
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