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5 Stocks to Gain From Fed's Dovish Stance in 2019

Swarup Gupta

All eyes are on the Federal Reserve, with a two-day meeting of the policymakers scheduled to start on Jan 29. Earlier this month, Fed Chair Jerome Powell had struck a dovish tone on monetary policy. This will likely remain the overarching theme for the year, with the Fed widely expected to leave rates unchanged after its last meeting.

Further, a report from The Wall Street Journal claims that the central bank is nearing the end of its balance sheet reduction process.  An end to offloading bonds would take the pedal off monetary tightening considerably. Rate-sensitive stocks are likely to gain from such a move. This is why it makes sense to park your funds in real estate and utilities stocks. 

Fed Close to Ending Balance Sheet Reductions

According to a report from The Wall Street Journal released on Jan 25, Fed officials are nearing a decision on ceasing the process of trimming the size of its balance sheet. The process started in October 2017 at which point it had ballooned in excess of $4.5 trillion.

Market participants have long believed that offloading these bonds have tightened the monetary environment even further. The upcoming two-day policy meeting is likely to see key Fed officials mulling over when to cease these bond-roll offs. In fact, officials hinted in December that the benchmark funds rate could turn volatile if the central bank continued with such bond sales.

The attitude of markets to the balance sheet trimming program is well known. An extreme negative reaction ensued when Fed Chair Powell suggested in December that the operation was likely to continue.

Now, key Fed officials are suggesting otherwise. In an interview to the Journal on Jan 15, Kansas City Fed President Esther George said: “A lot of heavy lifting has been done.”

Rate Hikes Unlikely Until June

Analysts and market watchers alike widely believe that the Fed is unlikely to hike rates at its upcoming meeting. Further, the central bank is likely to refrain from doing so in many more meetings over the next few months until the middle of summer is reached.

According to Andreas Johnson, U.S. economist at Nordic bank SEB, the Fed will likely “hold its target range” for the federal funds rate at 2.25-2.50% till June. At that point, the key rate will be hiked to 2.75%. Meanwhile, per the CME FedWatch Tool, the probability that the Fed will keep its rates unchanged at its upcoming meeting stands at 98.9%. 

A Bloomberg survey released recently also indicated that 60 out of 62 respondents believed that a rate hike was unlikely at the Jan 29 meeting. One factor preventing the Fed from taking a firm call on rates is the lack of official data. This is an outcome of the recent government shutdown, which has delayed several key releases.

Our Choices

Market watchers and economists widely believe that a rate hike after the latest Fed meeting is unlikely. Further, rates will likely remain unchanged until June. Additionally, reports have emerged that the central bank is mulling over ending its balance sheet reduction process.

Rate-sensitive investments like utilities and real estate stocks are useful additions to your portfolio under such circumstances. However, picking winning stocks may prove to be difficult.

This is where our VGM Score comes in. Here V stands for Value, G for Growth and M for Momentum and the score is a weighted combination of these three scores. Such a score allows you to eliminate the negative aspects of stocks and select winners. However, it is important to keep in mind that each Style Score will carry a different weight while arriving at a VGM Score. 

We have narrowed down our search to the following stocks based on a good Zacks Rank and VGM Score.

Ameren Corporation AEE is a utility company, which generates and distributes electricity and natural gas to residential, commercial, industrial and wholesale end markets in Missouri and Illinois.

Ameren has a Zacks Rank #1 (Strong Buy) and VGM Score of B. The Zacks Consensus Estimate for the current year has improved by 0.6% over the past 30 days.

Gibraltar Industries, Inc. ROCK manufactures and distributes products to the industrial and buildings market.

Gibraltar Industries has VGM Score of B. The company has expected earnings growth of 17.2% for the current year. The stock has a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.

NRG Energy, Inc. NRG is engaged in the production, sale and delivery of energy and energy products and services to residential, industrial as well as commercial consumers in major competitive power markets in the United States.

NRG Energy has a Zacks Rank #2 (Buy) and VGM Score of A. The company has expected earnings growth of 64.3% for the current year. The Zacks Consensus Estimate for the current year has improved by 8.2% over the past 30 days.

Pinnacle West Capital Corporation PNW provides electricity services (wholesale or retail) in the state of Arizona through its subsidiaries.

Pinnacle West has a Zacks Rank #2 and VGM Score of B. The company has expected earnings growth of 8.1% for the current year.

KBR, Inc. KBR is a global engineering, construction and services firm, supporting market segments of global hydrocarbons and international government services.

KBR has a Zacks Rank #2 and VGM Score of B. The company has expected earnings growth of 9.4% for the current year.

Zacks' Top 10 Stocks for 2019

In addition to the stocks discussed above, would you like to know about our 10 finest buy-and-holds for the year?

Who wouldn't? Our annual Top 10s have beaten the market with amazing regularity. In 2018, while the market dropped -5.2%, the portfolio scored well into double-digits overall with individual stocks rising as high as +61.5%. And from 2012-2017, while the market boomed +126.3, Zacks' Top 10s reached an even more sensational +181.9%.

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