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Fed's Powell Reaffirms a Rate Cut: Winners & Losers

Tirthankar Chakraborty

Federal Reserve Chair Jerome Powell recently said that economic outlook hasn’t improved in recent times. Trade uncertainties and concerns about global growth remain causes of concern, which in turn can persuade the central bank to lower rates as soon as possible. Nonetheless, here’s a rundown of the big winners and losers as if and when the rate cut happens —

Powell Locked in on a Rate Cut

Powell has dropped enough hints regarding a potential rate cut later this month, and this is primarily be down to two major issues. Firstly as Powell categorically puts it trade related matters still remain unresolved, and secondly, concerns about global economic growth continue to weigh on the U.S. economy.

Powell’s statement to the House lawmakers comes at a time when President Trump is relentlessly pressurizing the Fed to cut interest rates to bolster the U.S. economy. Some may say that the Fed is submitting to the pressure tactics of the President but Powell reaffirmed that the Fed is an independent body and won’t be swayed by Trump.

Nonetheless, Powell, the President’s choice to run the most powerful central bank in the world, is facing significant pressure to help the U.S. economy grow at a steady clip. Needless to say that Trump’s tariff strategy is already affecting economic growth.

Nonetheless, a slew of other factors apart from growth apprehensions is also posing a threat to the U.S. economy. Notable among them are muted inflation and a looming debt ceiling crisis that the Congress is yet to resolve.

Majority of policymakers too have agreed that the “economy had appeared to have lost some momentum” in recent weeks and that a rate cut is much needed in the near term as it could “cushion the effects of possible future adverse shocks to the economy.”

Rate-Sensitive Stocks to Gain

With the Fed widely expected to not hike rates in the near future, shares of rate-sensitive utilities and real estate will certainly climb. 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. Consequently, low interest rates will help them pay off debts and book profits.

However, higher interest rates and 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 to 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.

Given the buoyancy among rate-sensitive stocks, investors can bet on power generating company Atlantic Power Corporation AT and The Howard Hughes Corporation HHC, a developer of commercial, residential and hospitality properties.

Atlantic Power, currently, has a Zacks Rank #1 (Strong Buy). The Zacks Consensus Estimate for its current-year earnings has jumped more than 100% in the past 60 days. The company’s expected earnings growth rate for the current year is 50% compared with the Utility - Electric Power industry’s projected rally of 2.3%.

Recently, Howard Hughes has a Zacks Rank #2 (Buy). The Zacks Consensus Estimate for its current-year earnings has climbed more than 100% in the past 90 days. The company’s expected earnings growth rate for the current year is 198.5% against the Real Estate - Development industry’s expected decline of 1.9%.

Gold Prices to Rise

Thanks to the dovish expectations, gold prices are expected to rise. In fact, gold futures on the COMEX division of the New York Mercantile Exchange are already rising on hopes for rate cuts. This is because lower interest rates generally tend to make bonds and other fixed-income investments less attractive.

Money will flow out of bonds and money market funds as they can’t provide higher yields, and in turn may flow into gold. It’s worth pointing out though that the yellow metal offers no yield at all.

With gold prices set to gain, investing in Kinross Gold Corporation KGC and Royal Gold, Inc. RGLD seems prudent at the moment. Kinross Gold currently has a Zacks Rank #2. The Zacks Consensus Estimate for its current-year earnings has climbed 15.4% in the past 60 days. The company’s expected earnings growth rate for the current year is 50% compared with the Mining - Gold industry’s projected rally of 12%.

Meanwhile, Royal Gold flaunts a Zacks Rank #1. The Zacks Consensus Estimate for its current-year earnings has moved 1.3% up in the past 60 days. The company, which is part of the Mining - Gold industry, is expected to record earnings growth of 23.3% and 117.4% in the current and next quarters, respectively.

Financials: Not So Lucky

A more dovish Fed, however, doesn’t bode well for financials. But, why? Lower interest rates will dent bank profits as they decrease the spread between what banks earn by funding longer-term assets, such as loans, with shorter-term liabilities.

Insurers, by the way, derive their investment income from investing premiums, which are received from policyholders in corporate and government bonds. Yields and coupons on these bonds rise in response to rise in interest rates. This enables life insurers to invest their premiums at higher yields and earn more investment income, expanding their profit margins, which certainly is not possible in a low interest rate scenario.

Similarly, a decrease in interest rates generally concurs during periods of economic weakness and low consumer confidence, which doesn’t bode well for brokerage firms and asset managers either.

Technology & Home Improvement Stand to Lose

Other than the broader financial sector, technology firms stand to lose from a rate hike. Interest rates correlate with an economy that is getting weak day by day and that could easily affect the bottom lines of smartphone makers like Apple Inc. AAPL.

Decline in rates may also compel would-be home buyers to search for new houses and not look for improving their existing ones. Consequently, home improvement majors Lowe’s Cos. LOW and Home Depot HD stand to lose.

You can see the complete list of today’s Zacks #1 Rank stocks here.

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