Wall Street recently cheered the more accommodative monetary policies for the days ahead. After all, the recent Fed nominees are open to interest rate cuts. And the U.S. economy is at the brink of a slowdown phase, which definitely calls for rate cuts.
Needless to say, rate-sensitive stocks tend to rise in an environment when rates are declining as it eventually leads to cheaper borrowing costs. Thus, investing in real estate and utility players seems like a judicious move. Gold is another lucrative investment option as its prices push higher on hopes of more policy easing.
Judy Shelton and Christopher Waller to be Fed Governors
President Trump recently tweeted that he wants to appoint Judy Shelton and Christopher Waller for the Federal Reserve Board. Both of them are known to have supported lower interest rates. They believe that lower interest rates and a loose monetary policy will help the economy expand in the near term.
Judy Shelton had openly said that the federal funds rate should be around zero, while Waller has completely rejected the Phillips Curve argument that as jobless rate declines, wages should improve leading to higher inflation, necessitating rise in rates.
The Fed’s dot plot from the June meeting, by the by, has shown that there is a clear divide among Fed officials when it comes to holding rates steady or slashing rates. But, with Shelton and Waller leaning to the dovish side, we can certainly expect a rate cut pretty soon.
Trump is also in favour of rate cuts. And why not? With G-7 countries keeping rates at around zero, the Fed is making U.S. products less competitive globally by keeping the funds rate between 2.25% and 2.5%.
Slowing U.S. Economy Supports Lower Rates
Fed is, further, widely expected to lower rates as the U.S. economy isn’t in good shape. A measure of private job additions fell short of expectations, while reports on the service sector and trade are also discouraging.
U.S. private sector saw 102,000 job additions in June, below the 140,000 expected by analysts, per ADP report. Additionally, the Institute for Supply Management’s nonmanufacturing index fell to 55.1% in June from 56.9% in May, below expectations of 55.9%. U.S. factory orders, in the meanwhile, dropped 0.7% in May, in-line with expectations.
Rate-Sensitive Stocks to Make Merry
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. Thus, low interest rates will help them 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 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.
Gold Prices to Rise
Thanks to the dovish expectations, gold prices are expected to rise. 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.
Top 5 Winners
We have, thus, selected five solid stocks from the aforesaid sectors that are poised to gain from decelerated hikes in the near term. These stocks flaunt a Zacks Rank #1 (Strong Buy) or 2 (Buy).
Atlantic Power Corporation AT owns and operates a fleet of power generation assets in the United States. The stock currently has a Zacks Rank #1. 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%.
Middlesex Water Company MSEX owns and operates regulated water utility and wastewater systems. The stock currently has a Zacks Rank #1. The Zacks Consensus Estimate for its current-year earnings has advanced 5.9% in the past 60 days. The company’s expected earnings growth rate for the current year is 10.7% compared with the Utility - Water Supply industry’s estimated rise of 2.9%.
The Howard Hughes Corporation HHC owns, manages, and develops commercial, residential and hospitality operating properties in the United States. The stock currently has a Zacks Rank #1. The Zacks Consensus Estimate for its current-year earnings has climbed more than 100% in the past 60 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 1.8%. You can see the complete list of today’s Zacks #1 Rank stocks here.
Kinross Gold Corporation KGC engages in the acquisition, exploration and development of gold properties in the United States. The stock currently has a Zacks Rank #2. The Zacks Consensus Estimate for its current-year earnings has climbed 8.3% in the past 60 days. The company’s expected earnings growth rate for the current year is 30% compared with the Mining - Gold industry’s projected rally of 16.1%.
Royal Gold, Inc. RGLD acquires and manages precious metal streams, royalties, and related interests. The stock currently has a Zacks Rank #1. The Zacks Consensus Estimate for its current-year earnings has moved 1.3% up in the past 90 days. The company, which is part of the Mining - Gold industry, is expected to record earnings growth of 23.3% in the current quarter.
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Atlantic Power Corporation (AT) : Free Stock Analysis Report
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