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Fed Cuts Key Interest Rate a Quarter Point: Winners & Losers

Tirthankar Chakraborty

The Fed trimmed target interest rate by a quarter of a percentage point for the second time in just seven weeks, a widely expected move to sustain the decade-long economic expansion amid trade war concerns.

However, the Fed officials gave divided opinions on further rate cuts for the rest of the year, leading to a volatile trading session. Even so, U.S. stocks managed to climb back with the rate-sensitive utility sector gaining the most, and bank stocks finishing in the green. In contrast, gold prices dropped as U.S. dollar strengthened after the Fed cut rates.

Investors Digest Fed Rate Cut

The Fed lowered interest rates to lend support to an economy which is facing trade tensions with China and other heightened geopolitical issues such as the attacks on Saudi Arabia’s oil production facilities.

The Fed trimmed rates to a range of 1.75% to 2%. Decline in business investments as well as exports coupled with persistently low level of inflation were cited as the primary reasons behind the rate cuts. If the trade war escalates and hurts growth, Fed Chairman Jerome Powell said that the central bank may lower rates further. Powell did say that “if the economy does turn down, a sequence of rate cuts could be appropriate.”

But, President Trump criticized the Fed statement. He tweeted that “Jay Powell and the Federal Reserve Fail Again. No "guts," no sense, no vision!” He expected the Fed to slash rates more aggressively, thanks to a record-low unemployment level and confident consumers.

In fact, the Fed’s policy statement showed that not all officials were in agreement over further rate cuts this year. Only seven of the 17 members are expecting additional rate cuts this year. What’s more, Kansas City Fed President Esther George and Boston Fed President Eric Rosengren didn’t want a rate cut, while St. Louis Fed President James Bullard wanted to trim rates by half a percentage point this time around.

U.S. Stocks Wobble, Rate-Sensitive Utilities Gain

Investors were certainly disappointed after the Fed officials gave mixed signals about future rate cuts this year. But, stocks somehow chipped away their losses after Powell expressed confidence about the U.S. economic outlook.

Most importantly, shares of rate-sensitive utilities scaled north, with the Utilities Select Sector (XLU) increasing 0.4%, the highest among all S&P 500 sectors. This is because utilities are capital-intensive businesses and the funds generated from internal sources are not always sufficient to meet their requirements. Consequently, these companies have high levels of debt. Thus, an interest rate cut will help them pay off debts and book profits.

However, higher rates along with an increase in the debt level, for that matter a steep debt/equity ratio, impact the credit ratings of these utility operators. If the credit ratings go down, a company will find it difficult to borrow funds from the markets at reasonable rates, leading to a rise in cost of operations.

Given the buoyancy among rate-sensitive stocks, investors can bet on energy company NRG Energy, Inc. NRG and provider of water and electric services, American States Water Company AWR.

NRG Energy currently has a Zacks Rank #2 (Buy). The Zacks Consensus Estimate for its current-year earnings has moved up 2.6% in the past 60 days. The company’s expected earnings growth rate for the current year is 61.4% compared with the Utility - Electric Power industry’s projected rally of 4.3%.

Meanwhile, American States Water currently has a Zacks Rank #2. The Zacks Consensus Estimate for its current-year earnings has advanced 6% in the past 60 days. The company’s expected earnings growth rate for the current year is 22.7% compared with the Utility - Water Supply industry’s estimated rally of 0.5%.

Rate Cut Fuels Banks’ Rally

Generally when there is a rate hike, banks are definitely the go-to rate trade. Higher interest rates boost bank profits as they increase the spread between what banks earn by funding longer-term assets, such as loans, and shorter-term liabilities.

But, the SPDR S&P Bank ETF (KBE) managed to increase nearly 0.7% after the Fed approved a quarter-point rate cut, with large banks including JPMorgan Chase & Co. JPM and Citigroup Inc. C registering a 1% and 0.9% increase, respectively.

And why not? As rightly pointed out by CNBC’s Jim Cramer, “people are buying the bank stocks because there’s a chance Powell’s rate cuts may put an end to the artificially inverted yield curve, and at the same time he’s committed to prevent the economy from slipping into a credit-ruining recession.”

This calls for investing in banks. And we have zeroed down to three — BCB Bancorp, Inc. BCBP, Customers Bancorp, Inc. CUBI and First Bancorp FBNC. Here’s why –

BCB Community Bank has a Zacks Rank #2. The Zacks Consensus Estimate for its current-year earnings has climbed 1.7% over the past 60 days. The company’s expected earnings growth rate for the current year is 17.8%, more than the Banks - Northeast industry’s projected rally of 7%.

Customers Bancorp has a Zacks Rank #1 (Strong Buy) now. The Zacks Consensus Estimate for its current-quarter earnings has moved 1.4% north in the past 60 days. The company’s expected earnings growth rate for the current quarter is 17.7% compared with the Banks - Southeast industry’s expected rally of 6.5%. You can see the complete list of today’s Zacks #1 Rank stocks here.

First Bancorp currently has a Zacks Rank #2. The Zacks Consensus Estimate for its current-year earnings has increased 2.3% in the past 60 days. The company’s expected earnings growth rate for the current quarter is 8.1% compared with the Banks - Southeast industry’s projected rally of 6.5%.

Dollar Strengthens, Gold Falls

A Fed rate cut should have compelled investors to sell dollar-denominated assets, eventually weakening the dollar’s exchange rate. Still, the dollar firmed as Fed officials gave an uncertain outlook on further easing.

The ICE U.S. Dollar Index, which measures dollar’s strength against a basket of major currencies, increased nearly 0.4% in the last trading session to 98.60. While the euro fell to 1.1031 dollars in late New York trading, the British pound was down to 1.2463 dollars.

Gold prices, in the meanwhile, dropped below $1,500/oz following the FOMC meeting. Owing to the rise in the value of U.S. dollar in relation to other currencies across the world, the yellow metal became pricier in terms of other currencies, eventually leading to fewer buyers. And with demand for the commodity dropping, price of gold took a hit as well.

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Click to get this free report NRG Energy, Inc. (NRG) : Free Stock Analysis Report American States Water Company (AWR) : Free Stock Analysis Report Citigroup Inc. (C) : Free Stock Analysis Report JPMorgan Chase & Co. (JPM) : Free Stock Analysis Report First Bancorp (FBNC) : Free Stock Analysis Report Customers Bancorp, Inc (CUBI) : Free Stock Analysis Report BCB Bancorp, Inc. (NJ) (BCBP) : Free Stock Analysis Report To read this article on Zacks.com click here. Zacks Investment Research