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Is July Rate Cut a Certainty? 6 Great Picks

Swarup Gupta

Until last week, a rate cut in July was a near certainty. Both the Federal Reserve and the Fed Chair had recently adopted a soft monetary stance, gladdening investors. But comments from Powell on Jun 25, echoed by James Bullard, dampened sentiment and reduced expectations of a July rate cut.

However, on closer examination it seems Powell’s comments were largely a reaction to President Trump’s recurrent criticism of the central bank. On Jun 24, Trump went so far as to say that he has the power to replace the Fed Chair. This is why it is likely the Fed will go on to cut rates, taking cues from weak economic readouts, such as the latest consumer confidence data.

Rate-sensitive stocks are likely to gain from a soft rate environment. This is why it makes sense to park your funds in real estate investment trusts (REITs) and utility stocks, which also offer attractive dividends.

Powell Asserts Central Bank’s Independence

Speaking to members of the Council on Foreign Relations in New York on Jun 25, Fed Chair Powell stressed that central bank independence had been a major feature of financial systems for more than a century. Powell also warned of “the damage that often arises when policy bends to short-term political interests.”

Powell’s comments were a direct reaction to Trump’s recurrent criticism of the Fed’s policy stance. On Jun 24, Trump tweeted that the central bank “doesn’t know what it is doing.” Trump, who has called for lower rates on several occasions, also hinted in an interview to NBC that he had no plans of removing Powell. At the same time, he would “be able to do that if I wanted.”

Also, the Fed Chair’s comments were essentially a reaction to Trump’s continual heckling. But investors chose to focus on only part of his message where he said that the Fed “should not overreact” to a unique event when taking a call on rates. He also stated that the Fed was “grappling” with deciding whether headwinds like the trade war and global economic weakness warranted policy cation.

Consumer Confidence Slump Hints at Economic Troubles

Interestingly enough, Powell also said that it was generally correct for central banks to preempt a crisis instead of letting an economic crisis “gather steam.” He added that the central bank was closely watching “the evolving risk picture and incoming data.” And at this point, a spate of worrying data points is building up.

The latest of these is June’s consumer confidence report. The index slumped from a revised level of 131.1 in May to 121.5 in June. This is the metric’s lowest level since September 2017, largely a result of simmering trade tensions and a decline in economic growth.

A major drop in May’s job gains is another cause for concern. The Conference Board’s survey also reflects this fact with more Americans, 16.4% vs. 11.8%, saying that getting a job has become harder since last month.

Our Choices

The Fed Chair’s comments have led to a third successive loss for the Nasdaq. But investors should focus on the political motives behind Powell’s comments instead of thinking that a July rate cut is off the agenda. Dismal consumer confidence data could easily push the Fed to affect a rate cut next month.

Rate-sensitive investments like utilities and REITs, which offer attractive dividends, are useful additions to your portfolio under such circumstances. However, picking winning stocks may 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.

The GEO Group, Inc. GEO specializes in the design, development, financing and operation of correctional, detention and community reentry facilities.

The GEO Group carries a Zacks Rank #1 (Strong Buy) and has a VGM Score of A. The company’s expected earnings growth for the current year is 8.3%. The Zacks Consensus Estimate for the current year has improved by 35.4% over the past 60 days. The stock has a dividend yield of 8.8%.

Arbor Realty Trust, Inc. ABR invests in real estate-related bridge and mezzanine loans, preferred equity, mortgage-related securities and other real estate-related assets.

Arbor Realty Trust has a VGM Score of B. The company’s expected earnings growth for the current year is 1.2%. The Zacks Consensus Estimate for the current year has improved by 5.1% over the past 60 days. The stock has a dividend yield of 9.2% and sports a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.

Clipper Realty Inc. CLPR specializes in acquiring, owning, repositioning, operating, and managing commercial and multifamily residential properties in the New York metropolitan area.

Clipper Realty has a Zacks Rank #2 (Buy) and VGM Score of A. The company has expected earnings growth of 16.7% for the current year. The Zacks Consensus Estimate for the current year has improved by 3.9% over the past 60 days. The stock has a dividend yield of 3.1%.

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

Pinnacle West carries a Zacks Rank #2 and has a VGM Score of B. The company’s expected earnings growth for the current year is 6.8%. The stock has a dividend yield of 3%.

Brookfield Renewable Partners L.P. BEP owns and operates renewable power generating assets.

Brookfield Renewable Partners carries a Zacks Rank #2 and has a VGM Score of B. The company’s expected earnings growth for the current year is more than 100%. The Zacks Consensus Estimate for the current year has improved by 23.7% over the last 30 days. The stock has a dividend yield of 6%.

Northwest Natural Holding Company NWN builds and maintains natural gas distribution systems, as well as invests in natural gas pipeline projects through its subsidiaries.

Northwest Natural Holding carries a Zacks Rank #2 and has a VGM Score of B. The company’s expected earnings growth for the current year is 1.7%. The Zacks Consensus Estimate for the current year has improved by 0.9% over the past 60 days. The stock has a dividend yield of 2.8%.

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Brookfield Renewable Partners L.P. (BEP) : Free Stock Analysis Report
 
Pinnacle West Capital Corporation (PNW) : Free Stock Analysis Report
 
Northwest Natural Gas Company (NWN) : Free Stock Analysis Report
 
Arbor Realty Trust (ABR) : Free Stock Analysis Report
 
Geo Group Inc (The) (GEO) : Free Stock Analysis Report
 
Clipper Realty Inc. (CLPR) : Free Stock Analysis Report
 
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