The Federal Reserve hiked rates for the third time since the global financial crisis this month, in a widely expected move that reflects confidence in the strength of the economy. However, the Fed signaled at only two more rate hikes by the end of the year, sheer disappointment for traders who expected a more hawkish tone on the pace of the tightening cycle.
The Fed dropped hints that it will not raise rates four times this year, a definite loss for the Wall Street and a win for the Main Street. Such a tempered outlook made investors buy Treasuries, pushing yields lower and adversely affecting banks, but, was a blessing in disguise for dividend payers. This conservative approach also knocked the dollar helping gold prices rebound.
Fed Raises Rates by a Quarter Point
Fed Chair Janet Yellen and her colleagues lifted a key interest rate for the second time in three months. Citing an improving labor market and greater confidence in consumers, the Fed raised its federal funds rate to a range of 0.75% to 1%. The policy rate rose by 25 basis points to 1% for the first time in a decade.
Fed officials also see core inflation “moving close” to their desired target of 2% by next year, but, not overshooting. The central bank’s preferred gauge of inflation, the PCE index, rose at a pace of 1.9% in the 12-month span ended in January, more than double the rate registered last summer.
Future rate hike expectations scaled higher as well. The Fed’s “dot plot”, a table of policymakers’ projections for short-term interest rates, also penciled two rate hikes for this year and three in 2018. The decision was unanimously supported by members of the policy-making committee except for Minneapolis Fed’s Neel Kashkari.
Bank Stocks Take a Hit
A rate hike generally tends to be a positive for banks. Higher longer-term interest rates can boost bank profits as they increase the spread between what banks earn by funding longer-term assets, such as loans, and shorter-term liabilities. The spread between long-term and short-term rates also expands during interest rate hikes because long-term rates tend to rise faster than short-term rates.
Yet, bank shares reacted in an adverse way, indicating that investors have been expecting an even more aggressive rate hike forecast. Needless to say that such a rate hike was already factored into decision making in recent weeks. Fed’s cautious approach pushed the yield on the benchmark 10-year U.S. Treasury note to its biggest one-day drop since June, falling to 2.500% on Mar 15 from 2.595% the day before.
Decline in bond yields spurred some selling in bank stocks. Shares of big banks including The Goldman Sachs Group, Inc. GS and Bank of America Corporation BAC declined 0.4% and 0.6%, respectively. Exchange-traded funds that track the financial sector also showed lackluster trade. The SPDR S&P Bank ETF (KBE) was down 0.7%. Financials on Mar 15 were the weakest among the S&P 500’s 11 sectors.
Dividend Payers Shine, Gold Gains Allure
Utilities, real estate and telecommunications, on the other hand, were among the biggest gainers. The lower bond yields sent such high-dividend paying stocks higher. These stocks benefited from drawing attention of many conservative, income-focused investors who might have otherwise invested in bonds. The Utilities Select Sector SPDR XLU, the Real Estate Select Sector SPDR XLRE and SPDR S&P Telecom XTL gained 1.6%, 1.9% and 1.8%, respectively.
Higher interest rates, in the meanwhile, enhance the appeal of holding dollars. But, the U.S. Dollar Index tumbled to 100.30 on Mar 15, its lowest level Feb 20 on the back of a dovish outlook from the Fed. The weaker dollar helped commodities like gold as the yellow metal becomes cheaper for holders of other countries. Gold prices are up more than 1% following the rate hike. The broader Materials Select Sector SPDR XLB increased 1.6%.
Top 5 Winners
As mentioned above, banks, the direct beneficiaries of a rate hike, in fact, pared gains. Meanwhile, dividend payers along with the yellow metal moved north.We have, thus, selected five solid stocks from such areas that have gained the most from the Fed’s not-so-hawkish stance. These stocks flaunt a Zacks Rank #1 (Strong Buy) or 2 (Buy).
Ameren Corporation AEE operates as a public utility holding company in the U.S. It operates through four segments: Ameren Missouri, Ameren Illinois Electric Distribution, Ameren Illinois Natural Gas and Ameren Transmission. Ameren has a Zacks Rank #2 and has gained 1.4% on Mar 15. The company’s expected growth rate for the current year is 3.5%, more than the Utility – Electric Power industry’s increase of 0.7%. Moreover, the Zacks Consensus Estimate for its current year earnings increased 0.1% over the last 30 days.
MYR Group Inc MYRG, through its subsidiaries, provides specialty electrical construction services. The company – a Zacks Rank #1 stock – gained almost 2% on Mar 15. MYR Group’s expected growth rate for the current year is 38%, more than the Utilities – Electric Construction industry’s increase of 25.1%. Additionally, the Zacks Consensus Estimate for its current year earnings soared 5.6% over the last 30 days. You can see the complete list of today’s Zacks #1 Rank stocks here.
NVR, Inc. NVR operates as a homebuilder in the U.S. It primarily constructs and sells single-family detached homes, townhomes, and condominium buildings. The company has a Zacks Rank #1. NVR has not only ended in the green on Mar 15 but is also expected to grow at a rate of 23.6% in the current year, more than the Construction – Building Products – Home Builders industry’s increase of 12.3%. Moreover, the Zacks Consensus Estimate for its current year earnings surged 5.5% in the last 60 days.
Encore Wire Corporation WIRE manufactures and sells electrical building wire and cable products in the U.S. This Zacks Rank #1 company gained 2.1% on Mar 15. The company’s expected growth rate for the current year is 51.8%, more than the Industrial Products – Wire and Cable Product industry’s increase of 33.3%. Additionally, the Zacks Consensus Estimate for its current year earnings jumped 30.8% over the last 30 days.
Alamos Gold Inc. AGI engages in the acquisition, exploration, development, and extraction of gold deposits in North America. The company has a Zacks Rank #2. Alamos Gold rallied 10.7% on Mar 15. The company’s expected growth rate for the current year is a whopping 390%, way higher than the Basic Materials – Mining – Gold industry’s increase of 14.8%. To top it, the Zacks Consensus Estimate for its current year earnings improved 7.4% over the last 30 days.
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Ameren Corporation (AEE): Free Stock Analysis Report
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Bank of America Corporation (BAC): Free Stock Analysis Report
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