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6 Stocks to Gain With Fed Set to Keep Rates Unchanged

Swarup Gupta

U.S. stocks surged above a four-month high on Feb 18 ahead of the Fed’s two-day meeting scheduled to begin later today. The central bank is widely expected to keep rate hikes on hold, which is a major factor bolstering investor sentiment. But market watchers also expect more details on its plans to end balance sheet reductions.

The Fed is also likely to unveil its latest “dot plot” which outlines its interest rate expectations for the year as well as the long run. Investors would love to witness only one rate hike taking place this year and the next.

In fact, Goldman Sachs GS believes the Fed will let inflation run higher, allowing it to refrain from near-term rate hikes. Rate-sensitive stocks are likely to gain from such a dovish monetary stance. This is why it makes sense to invest in real estate investment trusts (REITs) and utility stocks.

Dot-Plot, Balance Sheet Cuts Timeline Expected

The central bank didn’t release a dot plot at the end of its January meeting. Instead, it outlined a neutral approach to interest rate adjustments. Per Fed Chair Jerome Powell, the new, “patient” approach was attributed to sluggish inflation and a dismal outlook for global growth.

So the last dot plot available is the one released in December 2018. At that point, the median forecast called for two rate hikes in 2019. Jan Hatzius, an economist at Goldman Sachs thinks the Fed’s will pencil in only one rate hike for 2019. Most economists concur with this view and think the next hike will come in 2020.

Balance Sheet Cuts to End Soon

The Fed is also expected to reveal “how and when” it will stop reducing the size of its balance sheet. At one point, Powell had said these cuts were on “auto pilot.”  But by the fourth quarter of 2018, investors had started to complain about this process. They alleged that it was resulting in unusually tight monetary conditions.

The consequent decline in equity markets led the Fed to claim that it was “open” to switching its stance on balance sheet runoffs. By last month, the majority of the central bank’s policymakers veered around to the view that “it would be desirable to announce before too long a plan” to end this process.

Fed to Allow For Higher Inflation, Says Goldman

Meanwhile, economists at Goldman Sachs believe that the Federal Reserve will tolerate a level of inflation higher than its targeted rate of 2%. At this point, the central bank is undergoing an overhaul of its current policy framework. It is seriously examining other approaches to inflation targeting.

Goldman is of the opinion that it will ultimately adopt an average inflation targeting approach. In this case, the Fed will aim for 2% inflation on average over an entire business cycle. This allows for higher prices during expansionary phases to balance sluggish prices levels during a recession.

According to Goldman, this approach would “decrease the likelihood of further near-term policy tightening.” In effect, it would further reduce the urgency to undertake rate hikes in the near future, resulting in an extended softer interest rate regime.

Our Choices

The Fed is widely expected to refrain from announcing a rate hike at the end of this week’s meeting. Further, it is anticipated to reduce expectations for future rate hikes. An announcement on when and how it plans to end balance sheet reductions is also likely.

Rate-sensitive investments like utilities and REITs are useful additions to your portfolio under such circumstances. However, picking winning stocks may prove to be difficult. We have narrowed our search to the following stocks based on a good Zacks Rank and other relevant metrics.

Plymouth Industrial REIT, Inc. PLYM is a full service, vertically integrated REIT.

Plymouth Industrial REIT flaunts a Zacks Rank #1 (Strong Buy). The company’s expected earnings growth for the current year is more than 100%. The Zacks Consensus Estimate for current-year earnings has moved 60.5% north over the past 30 days.

MYR Group Inc. MYRG is a holding company of leading specialty contractors serving the electrical infrastructure market throughout the United States and Canada.

MYR Group’s expected earnings growth for the current year is 24.9%. The Zacks Consensus Estimate for current-year earnings has improved 4.6% over the past 30 days. It sports a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.

Alexandria Real Estate Equities, Inc. ARE is a Pasadena, CA-based urban office REIT with a particular focus on collaborative life science and technology campuses.

Alexandria Real Estate Equities has a Zacks Rank #2 (Buy). The company’s expected earnings growth for the current year is 5.5%. The Zacks Consensus Estimate for current-year earnings has moved north by 0.3% over the past 30 days.

NextEra Energy, Inc. NEE is a public utility holding company engaged in the generation, transmission, distribution, and sale of electric energy.

NextEra Energy has a Zacks Rank #2. The company has expected earnings growth of 9.1% for the current year. The Zacks Consensus Estimate for current-year earnings has improved by 0.1% over the past 30 days.

Cousins Properties Inc. CUZ is a REIT in the United States that engages in the acquisition, ownership, development and management of Class A office and mixed-use properties throughout the Sunbelt markets of the United States.

Cousins Properties has a Zacks Rank #2. The company has expected earnings growth of 15.1% for the current year. The Zacks Consensus Estimate for current-year earnings has moved 14.2% north 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 Capital carries a Zacks Rank #2. The company has expected earnings growth of 7.1% for the current year. The Zacks Consensus Estimate for current-year earnings has moved 0.4% north over the past 30 days.

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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Pinnacle West Capital Corporation (PNW) : Free Stock Analysis Report
 
NextEra Energy, Inc. (NEE) : Free Stock Analysis Report
 
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MYR Group, Inc. (MYRG) : Free Stock Analysis Report
 
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PLYMOUTH IND RE (PLYM) : Free Stock Analysis Report
 
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