After years of near-zero interest rates the Federal Reserve has been lifting rates over the last few years. Now some analysts expect that instead of future rate hikes the Fed is actually preparing to lower rates, possibly as soon as its July meeting.
The biggest reason is slowing global growth which can be partially traced back to the ongoing trade war between the U.S. and China. The longer it takes for the two nations to reach a trading deal, the greater impact tariffs on both countries will have not only their own economies, but the global economy as well.
As anticipation grew for a rate cut in the near future, the stock market has staged a strong rally. There is always the risk that trade negotiations stall again, and/or that the Federal Reserve will resist the temptation to cut rates. Either occurrence could quickly erase the market’s recent gains, but at this point the market is convinced a rate cut is a real possibility, and it is in the best interest of both the U.S. and China to reach a deal as quickly as possible.
Some stocks react positively to higher rates, while others react positive to lower rates. Here are my top picks of stocks that will react positively should the Fed start to lower rates as expected.
Telecom giant AT&T (T) carries a lot of debt on its balance sheet. With around $185 billion locked up in long-term debt the company would get a nice break on interest expense if rates start to move lower. The stock itself becomes more attractive as well with T currently offering a massive 6.3% yield. Lower rates mean more money flowing out fixed income assets and into stocks, and T’s yield becomes even more attractive. Telecom is very competitive, but for leaders like AT&T Verizon (VZ) there is a lot of pricing power as they control so much of the overall market and barriers of entry for new competition in the space are very high and expensive. T trades at $32.40 with an average price target of $34.46.
Newmont Mining (NEM)
Gold prices can also be impacted by interest rates. Lower rates weaken the U.S. dollar and a weak dollar can boost gold demand. If yields start to fall, a lot of fixed income investors may start to view gold as a more attractive asset. Newmont Mining (NEM) has already started to move higher as the market prices in a possible rate hike and shares are now trading just shy of their 52-week high at $35.92. Analysts are bullish on the stock with an average price target of $39.94.
Procter & Gamble (PG)
Consumer staples are often used as defensive plays when investors are looking to lower their overall risk, such as times when interest rates are falling. It is clear that whether or not lower interest rates are positive for the stock market, investors also realize that the Federal Reserve would not consider lowering rates if everything was perfect in the overall economy. Consumer staples provide stability and typically they also offer investors high yields on their investment. Procter & Gamble (PG) is a perfect example. Its consumer goods maintain their demand in good or bad economic conditions, and the stock currently yields 2.7%. PG is currently trading just shy of its all-time high, and investor sentiment is very bullish on the stock. PG trades at $109.47 and analysts have an average price target of $105.21.
Perhaps the most sensitive sector in the market to interest rates is the housing sector. Even a small change in interest rates can have a material impact on 30-year home mortgages, so any drop in rates is a very positive development for homebuilders like Lennar (LEN). LEN has traded sideways over the last three months, but a rate cut would be a strong catalyst to break LEN out to the upside. The stock is a great value with a forward P/E of 8.6 and analysts see 4% per annum growth for the next five years. A rate cut should bring more homebuyers into the market who want to take advantage of the interest savings, and drive earnings higher for the major homebuilders. LEN trades at $51.22 with an average price target of $58.45.