Ahead of the Wednesday's Fed statement, investors were selling income generating stocks including utilities on anticipation of an imminent hike in short-term interest rates. However, the Fed's move to open the door for a rate hike helped these stocks end in the green.
Markets surged on Wednesday after FOMC’s policy statement indicated federal funds rate would be raised only gradually. The Federal Reserve’s move to eliminate the “patient” phrase from its guidance indicated the central bank edged a step closer to its much-anticipated first rate hike since 2006. However, the Fed officials downgraded economic growth and inflation projections, signaling it is no hurry to raise borrowing costs.
The unexpectedly dovish stance of the Federal Reserve helped benchmarks close higher on Wednesday. The FOMC meeting that concluded on Wednesday indicates a gradual pace of rate hikes. The Fed’s “dot plot” that tracks what Fed officials think rates should be at the end of the year, saw the median “dot” declining from 1.125% in December to 0.625% at this meeting. The median dot for next year also decreased from 2.5% in December to 1.875% in March.
Meanwhile, in a unanimous vote Fed officials dropped the word “patient" from the policy statement, indicating a possible rate hike in the next couple of months. Speaking at a news conference after the meeting, Federal Reserve Chairwoman Janet Yellen told reporters that a possible rate hike in June can’t be ruled out.
However, the Fed emphasized that change in its policy statement doesn’t mean it has decided on the timing of a rate hike. The central bank noted that a rate hike was “unlikely” in April and cautioned that it will only hike rates if it has “seen further improvement in the labor market and is reasonably confident that inflation will move back to its 2% objective over the medium term.”
Growth, Inflation Concerns
The Fed’s go-slow approach to raise rates came in the backdrop of a slowdown in economic growth in early 2015. The Fed said economic growth “moderated somewhat” following its December’s view of economic activity increasing at a solid pace. The central bank trimmed its growth forecast for 2015 to 2.3-2.7% from an earlier forecast of 3%.
At the same time the apex bank raised concerns that inflation measures were short of expectations, due to a slump in energy prices as well as low import prices. Speaking at the news conference, Yellen said inflation would remain below 1% over the year. The price index for personal consumption expenditures which is the Fed’s preferred measure of inflation rose only 0.2% in January. This was the lowest level experienced since Oct 2009, when the gauge increased 0.1%
3 Stocks That Gained
Ahead of the Fed statement, investors were selling income generating stocks including utilities on anticipation of an imminent hike in short-term interest rates. However, the Fed’s move to open the door for a rate hike helped these stocks end in the green. The Utilities Select Sector SPDR (XLU - ETF report) gained 2.7%, the second highest gainer among the S&P 500 sectors.
Key stocks from the sector including The AES Corp. (AES - Analyst Report), Duke Energy Corp. (DUK - Analyst Report), Ameren Corp. (AEE - Analyst Report) and Southern Company (SO -Analyst Report) increased 3.7%, 1.8%, 2.3% and 1.9%, respectively.
Below we present 3 stocks from the sector which moved upward Wednesday, each of which also has a good Zacks Rank.
WGL Holdings holds a Zacks Rank #2 (Buy) and gained 4.6% yesterday. The company has expected earnings growth of 5.8%. The forward price-to-earnings ratio (P/E) for the current financial year (F1) is 19.90.
Northwestern Corp. (NWE - Snapshot Report) which conducts its business operations as Northwestern Energy is one of the largest providers of electricity and natural gas in the northwest quadrant of the United States.
Northwestern Corp holds a Zacks Rank #2 (Strong Buy) and gained 2.5% yesterday. The company has expected earnings growth of 7.5% and P/E (F1) of 16.70.
Public Service Enterprise Group holds a Zacks Rank #2 (Strong Buy) and gained 2.4% yesterday. The company has expected earnings growth of 4.1% and P/E (F1) of 14.62.
Interest-rate sensitive sectors react more to movements in rates than in anticipation of renewed growth. Given the Fed’s current stance, it is likely that rates will not increase till the middle of the year and then increase only gradually. This is why these stocks would make for a prudent choice.
This article originally appeared at Zacks.com. Reprinted with permission.
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