They say "Change Is the Law of Nature," as it helps a society or
an individual to evolve and better adapt to the changing
conditions. However, the Federal Reserve apparently could not
afford a change to its rates given the economic conditions. The
central bank was compelled to keep short-term interest rates at
near-zero levels for over 67 months, and it continues to be so.
Fed's benchmark near-zero rate policy coupled with the monetary
stimulus was intended to revive the economy from the aftermath of
the recession in the late 2000s. Nonetheless, the economy has
reportedly been able to grow only at an average rate of 2.2% in the
five years post recession. This is less than the 3.6% average
quarterly growth rate from the end of World War II through 2007.
Let us further look into some other pointers that clearly suggest
that the expiry of the zero-rate policy is round the corner.
Grim Economic Pointers
With near-zero interest rates, interest income - which has been a
vital component in the personal income basket, has waned since 2007
and has virtually dried its coffers for a regular income stream.
This led senior citizens to prolong retirements and made career
advancements difficult for the younger generation. Subsequently,
wages have stagnated.
According to data compiled by Bloomberg, the real value of
compensation per hour rose by only 0.5% since 2009 - the weakest
growth since World War II. As wages remain static, discretionary
expenses reduce and adversely affect other sectors like retail and
housing. Retail and housing are vital pillars to the overall well
being of the economy.
At the other end of the spectrum, despite adding 209,000 jobs in
July, the unemployment rate increased to 6.2% from 6.1% in June.
Although unemployment rate is lurking near record low since Sep
2008, employers are increasingly finding it hard to scout talents
to fill vacant slots. This might ultimately lead to wage inflation,
making it a prerogative for Fed to ease out the life support for
the labor market.
Fed's monetary easing policy has probably outlived its lifespan and
lost its utility with an uninterrupted zero-interest policy for 67
months. It therefore should be prudent to annul this policy sooner
than later so that Fed is left with enough dry powder to counter a
fresh downturn if at all it comes.
Sectors to Benefit with Interest Rise
Rising interest rates are a boon for some sectors and bane for
some. Sectors that benefit from higher interest rates are primarily
those whose revenues depend on interest income. These include
banks, e-brokers and insurance sectors, which comprise diverse
firms that make money by investing cash in high-interest generating
Banks typically earn higher interest rate spread as interest rates
rise. At the same time, banks are likely to generate a higher ROI
by investing money at other high-margin businesses. On the other
hand, e-brokers stand to gain by collecting more trading fees as
more people buy stocks with improved investor confidence stemming
from higher interest rates.
In addition, e-brokers also stand a chance to gain higher
interest income by investing a significant chunk of depositors'
money in high-interest rate financial instruments. Insurance
companies benefit from rising interest rates by earning more money
from investments as well as charging higher premiums due to rising
inflation that generally accompany higher interest rates.
3 Top-Ranked Stocks from the Favored Sectors
Banc of California, Inc.
): Headquartered in Irvine, CA, Banc of California offers a
plethora of retail banking products and services in the U.S. This
Zacks Rank #1 (Strong Buy) stock has over $4 billion in
consolidated assets and more than 80 banking locations.
Banc of California has long-term earnings growth expectation of
12.5%. Furthermore, earnings estimate revisions for the current
quarter and year have been moving up. In addition, Banc of
California belongs to the Banking Industry that carries a Zacks
Industry Rank #27. As a guideline, the outlook for industries with
Zacks Industry Rank #88 and lower is 'Positive,' between #89 and
#176 is 'Neutral' and #177 and higher is 'Negative.'
Marcus & Millichap, Inc.
): This Zacks Rank #1 stock operates as a brokerage firm, offering
investment brokerage and financing services to clients of various
types and sizes of commercial real estate assets in the U.S. and
Canada. Earnings estimate revision for both the current quarter and
year has moved up in the last 30 days.
With long-term earnings growth expectations of 25.0%, Marcus &
Millichap is a solid pick. In addition, Marcus & Millichap
belongs to the Real-Estate-Development Industry that carries a
Zacks Industry Rank #77.
National General Holdings Corp.
): Based in New York, National General Holdings operates as a
specialty personal lines insurance holding company, providing
personal and commercial automobile insurance, supplemental health
insurance products and other niche insurance products in the U.S.
Earnings estimate revision for this Zacks Rank #1 stock for the
ongoing quarter and full year 2014 have moved up in the last month,
implying bullish sentiment for the long-term growth of the company.
With long-term earnings growth expectations of 15.0%, National
General Holdings is likely to outperform the broader equity market.
In addition, the company belongs to the Property and Casualty
Insurance Industry that carries a Zacks Industry Rank #80.
Amid positive indications that the Fed is likely to raise the
short-term interest rates sometime next year, a sneak peek to the
space for some possible outperformers backed by a solid Zacks Rank
and a favorable Zacks Industry Rank could be a great idea for
investors to gain from this season.
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