The Fed has opted to firmly maintain a dovish stance despite some early indications that the economy has bottomed out. Policymakers indicated that the Fed is not willing to make any moves with rates through 2022 to help get the economy out of the coronavirus-induced recession.
After all, the ongoing public health crisis has weighed heavily on corporate profit margins and poses considerable threat to livelihood. The National Bureau of Economic Research has said that the United States is now officially in recession and it comes as no surprise that the coronavirus outbreak played a huge part.
And even though the labor market has shown tentative signs of improvement, with May’s jobs report surprisingly showing 2.5 million job creations after April’s sharp losses, many still believe that it was too early for policymakers to conclude that the economy is recovering, and subsequently start raising rates.
Fed Chair Jerome Powell, incidentally, cautioned that the labor market is not out of the woods. He said that “my assumption is 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.”
In fact, the Fed officials projected U.S. GDP contraction of 6.5% this year before a 5% rise next year. Inflation is also expected to remain below Fed’s official target of 2% through 2022, which clearly shows that the Fed is not thinking about raising rates anytime soon.
That leaves the Fed’s federal fund rate within a range of 0% to 0.25%. The Fed had trimmed rates in mid-March as it was evident that the pandemic posed a serious threat to the economy.
What Rate Cut Means for Mortgage Rates
With the coronavirus outbreak compelling the Fed to maintain a dovish stance, its most likely that the 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 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.
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 5 Choices
We have, thus, selected five solid stocks from the aforesaid areas that are poised to gain from Fed keeping interest rates at an all-time low. These stocks flaunt a Zacks Rank #1 (Strong Buy) or 2 (Buy).
Beazer Homes USA, Inc. BZH designs, builds and sells single-family homes. The company currently has a Zacks Rank #1. The Zacks Consensus Estimate for its current-year earnings has moved up 7.7% over the past 60 days. The company’s expected earnings growth rate for the next year is 32.9%.
Atlantic Power Corporation AT is an independent electric power producer. The company currently has a Zacks Rank #1. The Zacks Consensus Estimate for its current-year earnings has risen 87.5% over the past 60 days. The company’s expected earnings growth rate for the current year is 309.1%.
NextEra Energy, Inc. NEE is a public utility holding company engaged in the generation, transmission, distribution, and sale of electric energy. The company currently has a Zacks Rank #2. The Zacks Consensus Estimate for its current-year earnings has climbed 0.1% over the past 60 days. The company’s expected earnings growth rate for the next quarter and current year is 14.6% and 8.2%, respectively. You can see the complete list of today’s Zacks #1 Rank stocks here.
American States Water Company AWR provides fresh water, wastewater services and electricity to customers in the United States. The company currently has a Zacks Rank #2. The Zacks Consensus Estimate for its current-year earnings has moved 1.8% north over the past 60 days. The company’s expected earnings growth rate for the next quarter and current year is 5.8% and 6.6%, respectively.
FrancoNevada Corporation FNV operates as a gold-focused royalty and stream company in the United States. It operates through two segment, Mining and Energy. The company currently has a Zacks Rank #2. The Zacks Consensus Estimate for its current-year earnings has moved up 2.8% over the past 60 days. The company’s expected earnings growth rate for the current year is 19.2%.
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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NextEra Energy, Inc. (NEE) : Free Stock Analysis Report
FrancoNevada Corporation (FNV) : Free Stock Analysis Report
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Atlantic Power Corporation (AT) : Free Stock Analysis Report
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