As was widely expected, the Federal Reserve refrained from raising rates at its recently concluded meeting. More importantly, it pledged to adopt a measured approach to further rate hikes, taking into consideration the economic situation at the time. Fed Chair Jerome Powell also struck a surprisingly dovish tone at the news conference following the meeting.
Some economists criticized what they believe to be an excessively dovish stance, designed to cater to equity markets. Others were of the opinion that a data-dependent approach was more in keeping with current circumstances.
What is clear at this point is that rate-sensitive stocks are likely to gain from such a move. This is why it makes sense to invest in real estate and utilities stocks.
Central Bank Turns Dovish, Promises Measured Approach to Hikes
Following this week’s two-day policy meeting, the Federal Reserve opted to leave the federal funds rate unchanged at its current band of 2.25-2.5%. This was a unanimous decision of all voting members. The central bank also removed language, which suggested “further gradual increases” in rates is needed.
Instead, the Fed’s policy statement exuded a new-found sense of dovishness. The central bank stated that it “will be patient as it determines” the future path of rate hikes. Such adjustments would take into account global financial and economic conditions and “muted inflation pressures.”
Balance Sheet Reductions Not on “Autopilot”
From October 2017, the Fed was allowing a fixed level of bond holdings to run off its balance sheet and reinvesting the rest. This has caused consternation among investors, who are wary about the prospect of tougher monetary conditions.
In December, Fed Chair Jerome Powell troubled investors by saying that the Fed’s program of reducing the bond holdings on its books was on “autopilot.” The central bank has taken a decidedly different approach after its latest meeting. A separate three-paragraph statement has been released to address the issue.
Per the statement, the Fed is “prepared to adjust any of the details for completing balance sheet normalization in light of economic and financial developments.” Clearly, the process is not on autopilot as Powell had earlier indicated.
The Fed went on to indicate that it could even expand its balance sheet if necessary. Such an expansion would take place “if future economic conditions were to warrant a more accommodative monetary policy than can be achieved solely by reducing the federal funds rate."
Powell Adopts Decidedly Soft Stance
Meanwhile, the Fed Chair adopted a decidedly soft stance on rates, indicating that the central bank has revised its outlook on further increases. Powell now believes that the “case for raising rates has weakened somewhat.”
Fed policymakers are dwelling on a number of issues at the moment. Powell hinted that inflation would be the decisive factor for further rate hikes. Geopolitical concerns such as Brexit talks and China’s economic slowdown are other worries the central bank is taking into consideration.
Our Choices
The Fed’s new-found dovishness clearly indicates that the central bank is showing greater sensitivity to current economic and financial conditions. Fresh statements from the Fed Chair indicate that near-term rates hikes will be hard to come by, given sluggish inflation and multiple geopolitical concerns.
Rate-sensitive investments like utilities and real estate stocks are useful additions to your portfolio under such circumstances. However, picking winning stocks may prove to 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.
Gibraltar Industries, Inc. ROCK manufactures and distributes products to the industrial and buildings market.
Gibraltar Industries has a Zacks Rank #1 (Strong Buy) and VGM Score of B. The company has expected earnings growth of 17.2% for the current year.
Ameren Corporation AEE is a utility company, which generates and distributes electricity and natural gas to residential, commercial, industrial and wholesale end markets in Missouri and Illinois.
Ameren has a VGM Score of B. The Zacks Consensus Estimate for the current year has improved by 0.6% over the past 30 days. The stock has a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.
NRG Energy, Inc. NRG is engaged in the production, sale and delivery of energy and energy products and services to residential, industrial as well as commercial consumers in major competitive power markets in the United States.
NRG Energy has a Zacks Rank #2 (Buy) and VGM Score of A. The company has expected earnings growth of 64.3% for the current year. The Zacks Consensus Estimate for the current year has improved by 8.2% over the past 30 days.
Jacobs Engineering Group Inc. JEC is one of the leading providers of professional, technical and construction services to industrial, commercial and governmental clients.
Jacobs Engineering has a Zacks Rank #2 and VGM Score of B. The company has expected earnings growth of 16.5% for the current year.
Pinnacle West Capital Corporation PNW provides electricity services (wholesale or retail) in the state of Arizona through its subsidiaries.
Pinnacle West has a Zacks Rank #2 and VGM Score of B. The company has expected earnings growth of 8.1% for the current year.
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