The US Federal Reserve has indicated that markets should brace for interest rate hikes as rising inflation is expected to strain the Fed’s hand sooner than expected. The Federal Open Market Committee kept the benchmark rate close to zero at its last meeting, but projections from officials suggest that two potential rate hikes could be underway before the end of 2023. That’s much faster than the outlook provided in March when the group signaled it did not anticipate any upward movements until 2024.
The stock market reacted harshly, with rate-sensitive stocks being hit the hardest. The US dollar rebounded after a prolonged slump. Commodity inventories then fell as the prices of oil, copper and gold fell.
Fed Chairman Jerome Powell said the market shouldn’t over interpret the projections because they don’t guarantee two moves in 2023. He might be right, as the committee still believes inflation will move. at its longer-term target 2.% level. The 5% year-over-year spike in inflation in May is causing investors to question whether the rise in the CPI is really transient.
Stocks and commodities are arguably overbought after the huge rallies in early 2021. The selloff could be a good opportunity to buy cheap names.
Canadian National Railway
CN (TSX: CNR) (NYSE: CNI) Was Already Under Pressure Over Its Purchase Agreement Kansas City Sud. The Fed-led liquidation in the market added to the pain. CN shares are trading at $ 130 a share at the time of writing, up from $ 148 in April.
CN is trying to buy Kansas City Southern for US $ 30 billion. This is 20% more than Kansas City Southern had agreed to take CP Rail, the Canadian competitor of CN. The high price tag and concerns that regulators could block the takeover have clouded CN shares. Investors should use the rare weakness to buy the stocks.
If the deal is approved, CN will become a dominant player in the North American industry, adding routes with Mexico to a unique network of nearly 20,000 miles of road that currently connects Pacific and Pacific ports. Atlantic Canada to the US Gulf Coast. If CN did not get approval to close the deal, it would simply continue to be a very profitable player generating carloads of free cash flow for investors.
The price of gold slipped as much as 5% or US $ 90 an ounce Thursday to US $ 1,770 an ounce in response to news from the Fed. Rising interest rates normally result in higher returns on risk-free investments. Gold doesn’t earn you anything for owning it, so the price of the yellow metal can come under pressure when the opportunity cost of owning gold increases.
Gold stocks fell in response, including Or barrique (TSX: ABX) (NYSE: GOLD), which ended Thursday down nearly 6% to $ 26 a share. Barrick Gold traded as high as $ 40 last August when gold hit $ 2,080 an ounce.
Short-term volatility could continue, but the sell-off in gold looks exaggerated and Barrick Gold looks undervalued at this level. The company produces gold at an all-inclusive sustaining cost of approximately US $ 1,000 per ounce. Barrick Gold has no net debt and is swimming in additional cash. In fact, the company is offering investors an additional US $ 0.42 per share this year in the form of a special return of capital on top of the US $ 0.36 per share in annualized dividends.
The bottom line
CN and Barrick Gold are leaders in their respective industries. Stocks look cheap today and could generate big gains for patient investors.
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The Motley Fool recommends Canada’s National Railways. Foolish contributor Andrew Walker owns shares of Canadian National.