Federal Reserve Chairman Jerome Powell gave enough hints that the central bank may again cut rates this month. Fed had already trimmed its federal funds rate by a quarter percentage point to a range of 1.75% to 2% last month, its second such rate cut since July.
Powell clearly mentioned that the job additions in the domestic market wasn’t as robust as thought, indicating that the Fed is ready to trim rates to boost the economy. The unemployment rate may have hit a fresh 50-year low last month, but, nonfarm payrolls increased by 136,000, less than 145,000 forecasted by economists.
What’s more, Powell said that global growth has slowed on trade concerns, thus, leaving the door open for another rate cut. The U.S.-China trade tussle had taken a toll on consumers as well as business houses. Not only has the trade war bumped up prices for American consumers, it has dampened business sentiments.
Meanwhile, the Hong Kong-based South China Morning Post recently reported that there has been “no progress” in the current U.S.-China trade talks. China, in fact, has refused to consider any changes related to forced transfer of technologies, something that has bothered the United States for quite some time.
By the way, chances of successful trade talks had diminished after the Trump administration blacklisted 28 Chinese companies, including AI firms, over human rights concerns. What’s more, the Trump administration may come out with possible restrictions on capital flows into China. And most of the focus will be on investments made by U.S. government pension funds.
The CME’s Fedwatch indicator recently showed that almost 80.7% of investors are now expecting another rate cut at the Fed’s Oct 28-29 meeting, up from 49% some time back. What’s more, expectations about the central bank trimming its benchmark short-term rates two more times by the end of this year have increased to some extent, added the CME Group.
With an overwhelming majority of observers seeing an imminent rate cut, certain sectors stand to gain. Take a look —
Stocks That Will Make the Most
With a rate cut probably in the cards, shares of rate-sensitive real estate and utilities will certainly climb. Rate cuts are a boon to real estate activities. After all, lower interest rates will decrease borrowing costs for projects, which will significantly help companies, predominantly involved in the construction business.
Utilities, meanwhile, are capital-intensive businesses and the funds generated from internal sources are not always sufficient to meet requirements. Consequently, these companies have high levels of debt. Thus, low interest rates will help pay off debts and book profits.
If we dig into others sectors, healthcare stocks generally outperform after a rate cut. Barclays has compiled data that shows that healthcare stocks generally rise nearly 7% in the nine months following a rate cut. And what makes this set of stocks stand out is that they tend to rise consistently. Moreover, healthcare stocks are known for paying hefty dividends, which makes them more alluring when rates decline in uneasy economic conditions. Needless to say, lower interest rates mostly tend to raise prices of high-yielding stocks.
Top 4 Picks
We have, thus, selected four solid stocks from the aforesaid sectors that are poised to gain from an expected rate cut. These stocks flaunt a Zacks Rank #1 (Strong Buy) or 2 (Buy).
KB Home KBH operates as a homebuilding company in the United States. The stock currently has a Zacks Rank #1. The Zacks Consensus Estimate for its current-year earnings has moved up 5.2% in the past 60 days. The company’s expected earnings growth rate for the current year is 64.9% against the Building Products - Home Builders industry’s expected decline of 8.8%.
Beazer Homes USA, Inc. BZH operates as a homebuilder in the United States. The stock currently has a Zacks Rank #1. The Zacks Consensus Estimate for its current-year earnings has moved more than 100% north in the past 60 days. The company’s expected earnings growth rate for the next quarter is 23.1% against the Building Products - Home Builders industry’s expected decline of 15.5%.
American Electric Power Company, Inc. AEP engages in the generation, transmission, and distribution of electricity for sale to retail and wholesale customers in the United States. The company has a Zacks Rank #2. The Zacks Consensus Estimate for its next-quarter earnings has moved 2.7% north in the last 60 days. The company, which is part of the Utility - Electric Power industry, is expected to notch earnings growth of 6.9% and 4.6% in the next quarter and current year, respectively. You can see the complete list of today’s Zacks #1 Rank stocks here.
Molina Healthcare, Inc. MOH provides managed health care services to low-income families and individuals. The stock currently has a Zacks Rank #1. The Zacks Consensus Estimate for its current-year earnings has climbed 1.4% in the past 60 days. The company, which is part of the Medical - HMOs industry, is expected to record earnings growth of 8.4% in the current year.
5 Stocks Set to Double
Each was hand-picked by a Zacks expert as the #1 favorite stock to gain +100% or more in 2020. Each comes from a different sector and has unique qualities and catalysts that could fuel exceptional growth.
Most of the stocks in this report are flying under Wall Street radar, which provides a great opportunity to get in on the ground floor.
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