Here’s What to Do Now in Case the Fed Waits Until September

Last Friday’s massive jobs numbers, while great economic news, may not be the news that some investors hoping for a July rate cut were looking for. Most on Wall Street were looking for about 165,000 jobs to be added, but the blow-out print of 224,000 was way off the radar for most firms, and it seemed to indicate that the economy is still much stronger than many anticipated. The weak May jobs number turned out to be a red herring of sorts, when the strong June figures were reported. The unemployment rate actually edged slightly higher to 3.7%, but still remains near 50-year lows.

The question now for investors is what will happen if the Federal Reserve decides to hold off on a rate cut until the September meeting. Chair Jay Powell will be speaking later this week, and it’s a good bet he will say that both he and the Federal Reserve governors are “looking closely” at the incoming data.

With interest rates still at close to generational lows, there doesn’t seem to be any immediate need to lower rates now. However, President Trump continues to jawbone Powell, citing the policies of foreign central banks as a major reason we should cut rates.

We screened the Merrill Lynch High Quality and Dividend Yield research database looking for stocks investors may want to consider moving to now that actually should do well regardless of the rate decision at the end of July. We found four great picks and all are rated Buy.

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Darden Restaurants

Regardless of the interest rate decision, people have to eat, and this company has consistently delivered the goods. Darden Restaurants Inc. (NYSE: DRI | DRI Price Prediction) is a casual-dining restaurant portfolio company. Its approximately 1,700 restaurants are 100% company-owned and include two large brands: 850 Olive Garden restaurants and 500 LongHorn Steakhouse units. The company’s smaller brands include Cheddar’s Scratch Kitchen, Capital Grille, Bahama Breeze, Seasons 52, Eddie V’s and Yard House.

Despite some so-so fiscal fourth-quarter results, the analysts remain positive and noted this in a recent report:

We remain Buy rated and believe Darden is well positioned for an industry shift towards scale going forward, which we think show up in its capabilities around data analytics and customer insights. The company’s ability to protect margins while driving strong top-line is a sharp contrast to casual dining peers who are struggling to get flow-through in a tough cost backdrop.

Darden shareholders receive a 2.82% dividend. The Merrill price target for the stock is $130, and the Wall Street consensus target is $126.88. The shares ended trading on Monday at $124.98 apiece.

Procter & Gamble

The company offers a very solid dividend and safety, and the stock is on the Merrill US 1 list. Procter & Gamble Co. (NYSE: PG) is one of the world’s largest consumer products companies, and it operates in five segments: Beauty, Grooming, Health Care, Fabric & Home Care, and Baby & Family Care. Its many brands include Pampers, Tide, Bounty, Charmin, Gillette, Oral B, Crest, Olay, Pantene, Head & Shoulders, Ariel, Gain, Always, Tampax, Downy and Dawn.

The company actually is innovative in its product development process and uses that to help ensure future growth and cash flow. This should provide investors years of steady growth and dividends.

Shareholders receive a 2.83% dividend. The Merrill team has a $119 price target, while the posted consensus price objective was last seen at $107.71. The stock closed Monday at $114.05 a share.

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Raytheon

This top defense company has a diversified mix of business and remains a favorite at Merrill Lynch. Raytheon Co. (NYSE: RTN) is an industry leader in defense, government electronics, space, information technology and technical services. The company operates in four principal business segments: Integrated Defense Systems, Intelligence, Information and Services, Missile Systems, and Space and Airborne Systems.

Top Wall Street analysts feel that the company could be one of the biggest winners as the global threat environment has been heightened substantially this year, and with 31% of total sales from international, the prospects remain very positive. Many cite the Patriot Missile deal signed with Poland as a good example, which could propel 2019 and beyond earnings.

In addition, many think Raytheon has the balance sheet capacity to pre-fund its pension to take advantage of the currently higher tax deduction, which could eliminate or reduce mandatory pension funding and provide a lift to 2019 free cash flow and earnings. It is set up for continued strong orders from the wave of recent foreign military sales approvals and its strong pipeline of large international missile defense projects.

Shareholders of Raytheon are paid a 2.17% dividend. The $224 Merrill price objective is well above the $208 consensus target price. The shares closed most recently at $173.77.

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VFC

This solid consumer apparel play posted outstanding results this year. V.F. Corp. (NYSE: VFC) is a leading apparel wholesaler of lifestyle brands, including North Face, Vans, Wrangler, Lee, Timberland and Nautica. VFC distributes products globally via department stores, independent retailers, specialty chains and its own retail (full price, outlet and e-commerce).

Coalition segments include Outdoor and Action Sports (68% of fiscal 2018 revenue), Jeanswear (21% of revenue), and Workwear/Imagewear (9% of revenue). The company has reported solid results this year, and it recently spun off its Kontoor Brands to pay down debt.

The Merrill analysts continue to recommend shares and said this in a recent report:

We believe VF Remain (which includes, The North Face, Vans, Timberland, and Workwear) remains very healthy. VF provided Fiscal 2020 guidance for Vans sales growth of +9-11%. Importantly, we believe the momentum in Vans is sustainable despite tougher comps driven by momentum in styles outside Old Skool (Slip-on now the fastest growing footwear franchise) as well as apparel (which is expected to outpace footwear growth).

Shareholders receive a decent 2.35% dividend. Merrill has set its price objective at $95. The consensus target price is right in line at $95.10, and the stock was trading most recently at $86.36 per share.

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It remains a toss-up whether the Fed actually will lower rates at the end of the month. One thing seems somewhat certain though. If they don’t lower rates until September, there could be some investor disappointment. Toss in more of the president’s twitter feed on the Fed in the media, and that could drive some selling. All these companies would tend to hold up better if that is the case. If the Fed does indeed lower rates, the market probably will drift higher.