The Fed has kept its benchmark interest rate steady and shows no signs of raising rates in the near term. The Fed holds the fed-funds rate in the range of 1.5-1.75%. Fed Chair Jerome Powell has categorically said that the central bank is quite comfortable with its current monetary policy as it provides cushion against weak global economic growth. In fact, the Fed is more likely to trim rates going forward as the central bank continues to find it difficult to achieve the desired inflation target of 2%.
Needless to say, inflation remained below the Fed’s target since 2012, except for 2018. Powell added that “we are not satisfied with inflation running below 2%, particularly at a time such as now where we’re a long way into an expansion and a long way into a period of very low unemployment, when in theory where inflation should be moving up.”
The Fed had trimmed interest rates three times last year following nine hikes in the previous three-year period. Drop in business investments and of course consistently-low inflation were the reasons for the rate cuts. At the same time, President Trump wanted the Fed to slash rates more aggressively, thanks to record-low unemployment levels.
Rate-Sensitive Stocks to Gain
There are several sectors, including utilities and real estate, which do remarkably well in case of no rate hike. This is because utilities are capital-intensive businesses and the funds generated from internal sources are not always sufficient to meet the requirements. Consequently, these companies have high levels of debt. Thus, low interest rates will help pay off debts and book profits.
However, higher interest 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.
Rate hikes are also a dampener for real estate activities. After all, higher interest rates will increase borrowing costs for projects, which will significantly affect companies, predominantly involved in the construction business.
Banks Should Rally
A decline or steady interest rates adversely impact net interest margins. Needless to say, a bank’s profit margin depends on its net interest income or the difference between the rates they charge as long-term loans and the rate they pay for short-term borrowings.
But if we look into non-interest income, banks continue to expand consumer lending businesses. Housing and car loans have increased considerably, thanks to lower interest rates. Lenders made $700 billion in mortgages in the third quarter of last year, thanks to customers’ rush to refinance, especially due to low mortgage rates.
Gold Prices to Rise
Gold mining stocks also have a fair chance to gain. Thanks to the dovish expectations, gold prices are expected to rise. This is because lower interest rates tend to make bonds and other fixed-income investments less attractive.
Money will flow out of bonds as they can’t provide higher yields, and in turn may flow into gold.
Top 4 Choices
We have, thus, selected four solid stocks from the aforesaid sectors that are poised to gain from Fed keeping interest rates steady. These stocks flaunt a Zacks Rank #1 (Strong Buy) or 2 (Buy).
NorthWestern Corporation NWE provides electricity and natural gas to residential, commercial, and industrial customers. The company currently has a Zacks Rank #2. The Zacks Consensus Estimate for its current-year earnings has increased 0.9% over the past 60 days. The company’s expected earnings growth rate for the current quarter is 11.2%.
TopBuild Corp. BLD engages in the installation and distribution of insulation and other building products to the U.S. construction industry. The company currently has a Zacks Rank #2. The Zacks Consensus Estimate for its current-year earnings has moved up 0.7% over the past 60 days. The company’s expected earnings growth rate for the current quarter and year is 16.7% and 29.4%, respectively.
Citigroup Inc. C, a diversified financial services holding company, provides various financial products and services for consumers, corporations, governments, and institutions. The company currently has a Zacks Rank #2. The Zacks Consensus Estimate for its current-year earnings has climbed 1.2% over the past 60 days. The company’s expected earnings growth rate for the current quarter and year is 15% and 14.1%, respectively.
Royal Gold, Inc. RGLD, together with its subsidiaries, acquires and manages precious metal streams, royalties, and related interests. The company currently has a Zacks Rank #1. The Zacks Consensus Estimate for its current-year earnings has risen 2.3% over the past 60 days. The company’s expected earnings growth rate for the current quarter and year is 77.9% and 83.5%, respectively. You can see the complete list of today’s Zacks #1 Rank stocks here.
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Click to get this free report NorthWestern Corporation (NWE) : Free Stock Analysis Report Citigroup Inc. (C) : Free Stock Analysis Report TopBuild Corp. (BLD) : Free Stock Analysis Report Royal Gold, Inc. (RGLD) : Free Stock Analysis Report To read this article on Zacks.com click here. Zacks Investment Research