Fed Hikes Rates, Gives Strong Outlook: Grab These 5 Stocks

As widely expected, the Federal Reserve raised key rates following its first meeting chaired by Jerome Powell. Once again, the Fed expressed its confidence in the economy, predicting a faster pace of growth for 2018. At the same time, the Fed reiterated that it intends to raise rates only three times this year, sticking to a gradual path of increases.

Of course, the Fed did state that it favors a faster pace of rate hikes for 2019. But steady growth and a gradualist approach to rate hikes means that investors can breathe easy. A strong economy and a rising rate environment are likely to benefit financials substantially. Investing in stocks from this sector looks like a smart move at this point.

Three Rate Hikes Likely in 2018

The Federal Reserve increased the federal funds rate by 0.25 percentage point following its first meeting under new Fed Chair Jerome Powell. The federal funds rate is utilized by banks to determine rates for car and small business loans, credit cards and mortgages. Following the increase, the target range for benchmark short-term interest rate stands between 1.5% and 1.75%.  

This was the sixth rate hike undertaken by the Fed since 2015, approved by a unanimous vote of the Federal Open Market Committee (FOMC). And though the Fed Chair opined that the economic outlook has strengthened, the central bank is sticking to its plan of hiking interest rates only thrice this year. However, the Fed stated this it is likely to hike rate three times instead of two in 2019.

Economic Outlook Brightens

In the statement released by the FOMC at the conclusion of its meeting, the committee stated that: “The economic outlook has strengthened in recent months.” These views seemingly contradicted an earlier comment that economic activity has been increasing at a “moderate” pace, which struck a softer tone than January’s description of economic expansion as “solid.”

Following the meeting, Powell said that the labor market continued to be resilient while economic expansion was occurring at a steady pace. Further, inflation seemed to be nearing its 2% target rate, he said. Powell said that tax cuts, steady job growth, a strong global economic outlook and a low rate environment were principally responsible for the upward revision in the Fed’s outlook.  

Further, the FOMC raised its forecast for yearly economic growth to 2.7%, significantly higher than its December projection of 2.5%. Of course, the last forecast was made before Congress passed tax cuts and reached a deal on a $300 billion increase in government expenditure.

Additionally, the Fed kept its inflation outlook of 1.9% unchanged while reducing its projection for unemployment from 4.1% to 3.8%. Unemployment is expected to decline to 3.6% by the end of 2019. The forecast for economic growth for the next year was also raised from 2.1% to 2.4%.

Our Choices

Even though the Fed hiked rates at the end of Powell’s first meeting as the central bank’s chairman, it is sticking to its plan of hiking rates only twice again this year. Further, the central bank has substantially increased its growth outlook for the current year.

Both these announcements are likely to gladden investors and benefit financial stocks substantially. Investing in banks, insurers and broking companies looks like a prudent option at this point. However, picking winning stocks may 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.

American Equity Investment Life Holding Company AEL through its wholly-owned operating subsidiaries is a full service underwriter of a broad line of annuity and insurance products, with a primary emphasis on the sale of fixed rate and index annuities.

American Equity Investment Life has a Zacks Rank #1 (Strong Buy) and a VGM Score of B. The company has expected earnings growth of 7.7% for the current year. The Zacks Consensus Estimate for the current year has improved by 11.5% over the last 60 days.