5 Stocks To Buy If Fed Cuts Rate Due To Coronavirus Scare

Coronavirus seems to wreak havoc across the globe. It has also impacted the stock market and pushed bond prices to record lows. With the health scare persisting, the Federal Reserve might ease monetary policies this month to stabilize the market.

Covid-19 Weighing Heavily on the Market

The coronavirus outbreak dragged the stock market down. In fact, for the week ending Feb 28, the Dow fell 12.4%, the S&P 500 lost 11.5% and the Nasdaq shed 10.5%. The S&P 500 Index posted its worst weekly performance since the 2008 crisis.

So far, 89,219 confirmed cases of Covid-19 have been recorded globally. Fatalities have risen to 3,058. In fact, at present, countries like South Korea, Japan and Italy are closing factories with a steep rise in confirmed coronavirus cases. There has been a significant decline in tourism across the globe.

In the United States, the administration expanded existing travel restrictions on Iran, and also increased travel advisories for Italy and South Korea, especially for specific regions in those countries. Public health officials have warned there is a high chance of infection clusters and this might result in temporary quarantines and production slowdowns.

Fed Prompts Easing

On Feb 28, Federal Reserve’s Chairman Jerome Powell said in a mid-day statement that central banks are “closely monitoring developments” and analyzing their impact on the economic outlook. Powell also added that the Fed “will use (our) tools and act as appropriate to support the economy.” Stocks pared losses after the statement and helped at least one of the major benchmarks, the Nasdaq Composite to close in the positive territory.

Powell’s statement indicates possibility of an interest rate cut to combat the impact of coronavirus. COVID-19 has impacted supply chains from China and globally, and forced companies to shift facilities from mainland China.

Along with that, Powell also hinted that though “the coronavirus poses evolving risks to economic activity” the “fundamentals of the U.S. economy remain strong.” Interest rates currently are between 1.5% and 1.75%. As the disease spreads, a 50-basis point cut can be expected in March.

Additionally, Bank of Japan’s Governor Haruhiko Kuroda said that, “BOJ will monitor developments carefully, and strive to stabilise [stabilize] markets and offer sufficient liquidity via market operations and asset purchases.”

Stocks to Gain from Interest Rate Cut

When the Fed or the central bank of any country eases its monetary policy by slashing interest rates, it acts as a growth catalyst. The low rates increase personal and corporate borrowing, which leads to greater profits and a robust economy.

Consumers also spend more in a low-rate environment, as buying a new house is more affordable along with other discretionary factors like private schooling. Businesses get the opportunity to perform finance operations at a cheaper rate, which increases their future earnings potential, leading stocks to rise higher.

Lower interest rate environment boost dividend-paying sectors such as utilities and real estate investment trusts (REITs) in particular. Why? These companies have stable cash flows and strong balance sheets, which benefit from cheaper debt financing. Moreover, profit from lower interest rate help these firms to provide higher dividends, attracting investors to invest more. (Read More: Zacks Investment Research

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Written By: Zacks Investment Research