On Jul 31, the Federal Reserve reduced the federal funds target rate for the first time since Dec 16, 2008. At that point, the U.S. economy was passing through a major economic crisis, which was threatening to weigh on the global economy. Ultimately, the central bank pushed the rate down from 1% to 0%-0.25%, a range which was maintained for seven years.
In raising rates after more than a decade, the Fed acknowledged the existence of threats which could impede economic growth in the near future. Markets were disappointed when the Fed Chair described the reduction as a “midcycle adjustment.” However, expectations of a second rate cut later this year remain high.
Rate-sensitive stocks are likely to gain from these developments. This is why it makes sense to invest in real estate investment trusts (REITs) and utility stocks, which also offer attractive dividends.
Global Economic Concerns, Sluggish Inflation Lead to Cut
The Federal Reserve’s policy makers reduced the federal funds target rate to a range of 2% to 2.25%. In doing so, it reduced the rate by 25 basis points, a development which had already been priced in by investors. The central bank attributed the fallout of “global developments for the economic outlook” and sluggish inflation as the primary catalysts for its decision to reintroduce monetary easing.
However, the Fed continues to believe that the present pace of growth is “moderate” and that the labor market remains “strong.” This means that the rate cut is largely preemptive in nature, taken due to the cushion provided by sluggish inflation. Experts believe that such preemptive steps could help the Fed avoid adverse circumstances in future, such as having to push rates down to the negative zone.
Powell Spooks Market, Further Cuts Expected
Despite the announcement of a widely expected rate cut, comments from Fed Chair Jerome Powell went on to unnerve investors on Wednesday. Referring to the reduction as a “midcycle adjustment,” the Fed Chair indicated that the central bank was not beginning a cycle of rate reductions.
Following these comments, stocks slumped, the dollar smashed through a two-year high and bond yields spiked. However, analysts pointed out that Powell had not suggested that future rate cuts were unlikely. At the same time, he possibly meant that a cycle of aggressive rate cuts was unlikely to begin any time soon.
In any case, the Federal Reserve has kept its options open as far as rate cuts are concerned. The central bank stated that it would act in a manner necessary “to sustain the expansion.” At the same time, its actions would be largely dependent on the nature of economic data flowing in. Notably, the Fed has also decided to stop trimming the size of its balance sheet.
Our Choices
The Fed’s maiden rate cut in more than a decade indicates that the central bank is willing to act in a manner necessary to sustain a record-busting phase of economic growth. While the Fed Chair has indicated that this is not the beginning of a cycle of aggressive rate reductions, the central bank has kept its options open for future cuts.
Rate-sensitive investments like utilities and REITs, which offer attractive dividends, are useful additions to your portfolio under such circumstances. We have narrowed our search to the following stocks based on a good Zacks Rank and other relevant metrics.
Unitil Corporation UTL is a public utility holding company which distributes electricity and natural gas in the United States.
Unitil’s expected earnings growth for the current year is 4%. The Zacks Consensus Estimate for current-year earnings has improved 1.1% over the past 30 days. The stock has a dividend yield of 2.5% and currently sports a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.
El Paso Electric Co. EE is a regional electric utility providing generation, transmission and distribution service to the retail and wholesale customers of the Rio Grande valley in west Texas and southern New Mexico.
El Paso Electric has a Zacks Rank #2 (Buy). The company’s expected earnings growth for the current year is 12.5%. The Zacks Consensus Estimate for current-year earnings has moved north by 4.4% over the past 60 days. The stock has a dividend yield of 2.3%.
Crown Castle International Corp. CCI is a leading independent operator of wireless communication towers in the United States.
Crown Castle has a Zacks Rank #2. The company has expected earnings growth of 8.1% for the current year. The Zacks Consensus Estimate for current-year earnings has improved by 0.8% over the past 30 days. The stock has a dividend yield of 3.4%.
Alexandria Real Estate Equities, Inc. ARE is a Pasadena, CA-based urban office REIT with particular focus on collaborative life science and technology campuses.
Alexandria Real Estate has a Zacks Rank #2. The company has expected earnings growth of 5.7% for the current year. The Zacks Consensus Estimate for current-year earnings has moved 0.1% north over the past 30 days. The stock has a dividend yield of 2.7%.
Essex Property Trust, Inc. ESS is a REIT engaged in the acquisition, development, redevelopment and management of multifamily residential properties in supply constrained markets.
Essex Property has a Zacks Rank #2. The company has expected earnings growth of 5.3% for the current year. The Zacks Consensus Estimate for current-year earnings has moved 1% north over the past 30 days. The stock has a dividend yield of 2.5%.
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