As the coronavirus outbreak continues to aggravate across the United States and several states have paused or rolled back plans to reopen their economies, the Fed reassured Americans about its promise to support the economy.
Needless to say, credit card spending declined and employment dropped in recent weeks. As a result, the Fed kept its benchmark short-term interest rate near zero and vowed to use its tools to revive the economy in such trying times. The Fed’s federal fund rate remains within a range of 0% to 0.25%. The Fed trimmed rates in mid-March as the pandemic made a serious damage to the economy.
In a statement after a two-day meeting on Jul 29, the Fed said that rates will remain at near zero levels until the economy is capable of weathering the current health crisis and achieving maximum employment.
The Fed said “the path of the economy will depend significantly on the course of the virus.” The central bank added that “economic activity has picked up somewhat in recent months but remain well below their levels at the beginning of the year.”
The Fed’s statement largely mirrors the version released in June that the pandemic “poses considerable risks to the economic outlook over the medium term.” Fed Chair Jerome Powell had cautioned that “there will be a significant chunk, well, well into the millions of people who don’t get to go back to their old jobs and there may not be a job in that industry for them for some time. It could be some years before we get back to those people finding jobs.”
Nonetheless, the Fed’s attempt to keep interest rates at low levels to bolster the U.S. economy can actually boost returns of various sectors. Let us, thus, look at who stands to benefit –
What Rate Cut Means for Mortgage Rates
With the coronavirus outbreak compelling the Fed to maintain a dovish stance, its most likely that mortgage rates will stay low in the near term as investors continue to park money in safe-haven assets like the 10-year Treasury note amid the economic slowdown.
Needless to say, mortgage rates in the United States generally follow the direction of the yield on the 10-year Treasury note. And bond yields decline when prices go up. And lower mortgage rates will certainly boost homebuying, which bodes well for housing-related stocks.
Capital-Intensive Businesses to Gain
Shares of rate-sensitive utilities will certainly climb. This is because utilities are capital-intensive businesses and the funds generated from internal sources are not always sufficient to meet 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 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.
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 as 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.
Healthcare & Consumer Staples Have Better Track Records
A low-interest environment generally indicates that the economy has hit a soft patch. In such a scenario, healthcare stocks which are predominantly defensive in nature tend to have consistent revenues and also provide comparatively high dividends.
By the way, in a low-interest environment, the cost of debt such as credit cards and mortgages are lower, freeing up income to spend on consumable items. Thus, consumer staple stocks also benefit immensely from low-interest rates.
Top 5 Choices
We have, thus, selected five solid stocks from the aforesaid areas that are poised to gain from Fed’s holding of interest rates at an all-time low. These stocks flaunt a Zacks Rank #1 (Strong Buy) or 2 (Buy).
PulteGroup, Inc. PHM primarily engages in the homebuilding business in the United States. The company currently has a Zacks Rank #1. The Zacks Consensus Estimate for its current-year earnings has risen 44.9% over the past 60 days. The company’s expected earnings growth rate for the current year is 22.1%.
American Water Works Company, Inc. AWK is a water supply and wastewater service provider. The company currently has a Zacks Rank #2. The Zacks Consensus Estimate for its current-year earnings has climbed 0.3% over the past 60 days. The company’s expected earnings growth rate for the current and next year is 6.4% and 10.2%, respectively.
Kinross Gold Corporation KGC engages in the acquisition, exploration and development of gold properties in the United States along with several other countries. The company currently has a Zacks Rank #2. The Zacks Consensus Estimate for its current-year earnings has moved up 14.5% over the past 60 days. The company’s expected earnings growth rate for the current quarter and year is 125% and 85.3%, respectively. You can see the complete list of today’s Zacks #1 Rank stocks here.
AdaptHealth Corporation AHCO provides home healthcare equipment, medical supplies, and home and related services. The company currently has a Zacks Rank #2. The Zacks Consensus Estimate for its current-year earnings has risen 43.3% over the past 60 days. The company’s expected earnings growth rate for the current and next year is 43.3% and 79.1%, respectively.
The Procter & Gamble Company PG provides branded consumer packaged goods to consumers. The company currently has a Zacks Rank #2. The Zacks Consensus Estimate for its current-year earnings has risen 0.4% over the past 60 days. The company’s expected earnings growth rate for the current and next year is 10% and 5.6%, respectively.
5 Stocks Set to Double
Each was hand-picked by a Zacks expert as the #1 favorite stock to gain +100% or more in 2020. Each comes from a different sector and has unique qualities and catalysts that could fuel exceptional growth.
Most of the stocks in this report are flying under Wall Street radar, which provides a great opportunity to get in on the ground floor.
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PulteGroup, Inc. (PHM) : Free Stock Analysis Report
Kinross Gold Corporation (KGC) : Free Stock Analysis Report
Procter Gamble Company The (PG) : Free Stock Analysis Report
American Water Works Company, Inc. (AWK) : Free Stock Analysis Report
DFB Healthcare Acquisitions Corp. (AHCO) : Free Stock Analysis Report
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