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At the Kansas City Federal Reserve's annual monetary policy symposium in Jackson Hole, Wyo, Chairman Jerome Powell clearly said that a gradual path of interest rate hikes seem appropriate owing to lack of clear signs of inflation crossing the required mark or an overheated economy.
Fed officials also noted that economic activity continues to rise at a steady pace, with the labor market going strong. And this reckons a steady pace of rate hikes every quarter.
This calls for investing in banks, insurance and brokerage houses as such institutions will see a ramp up in profits on continuous interest rate hikes and stable economic conditions.
Powell Affirms Gradual Pace of Interest Rate Hikes
Powell defended the Fed's push to raise interest rates at a gradual pace despite President Trump's criticism of higher borrowing costs. Powell said that gradual rate hikes seem appropriate as inflation has recently moved close to the Fed's desired 2%.
At the same time, there are no clear signs that inflation will rise above that level. There does not seem to be "an elevated risk of overheating" he added. After all, an overheated economy does experience a prolonged period of growth leading to high levels of inflation. He, thus, sees little danger in inflation spiraling out of control.
Having said that, the economy currently is healthy and that warrants steady rate hikes. Americans are pretty confident about their well-being as incomes rise at a steady clip and the labor market continues to create more opportunity for workers.
Economy in Good Shape
Disposable personal income increased $167.5 billion, or 4.5%, in the second quarter, which followed a gain of $256.7 billion or 7% in the first quarter. The recent jobs report also painted a pretty picture of an economy with opportunities for almost everyone.
The U.S. economy added 157,000 new jobs in July and has risen for 94 successive months, the longest streak on record. The economy, at the same time, created 59,000 more jobs in May and June than reported earlier. Thus, the average gains for the three-month period came in a solid 224,000.
The jobless rate, in the meantime, dropped to 3.9%. This is the eighth time that the unemployment rate has fallen below the 4% mark since 1970. The current unemployment rate is now at a nearly two-decade low. The real unemployment rate, also known as U6, contracted to 7.5% from 7.6%. The U6 now stands at a level lower than it was during the 2007-2009 recession.
Mester Backs Gradual Pace of Rate Hikes
Cleveland Fed President Loretta Mester, in the meantime, backed gradual pace on interest rate hikes. She said in an interview on CNBC that it's "pretty clear" that the Fed would have to keep hiking rates as the economic growth remains solid, with unemployment rate at ultra-low levels and inflation hovering near the 2% range.
Market pundits are analyzing "gradual" pace as one quarter-point rate hike per quarter. The Fed has already penciled two more rate hikes for this year. Investors are now seeing a 90% chance of a rate hike in September and 60% probability of one in December.
Who Stands to Gain From a Rate Hike?
Measured rise in interest rates can boost bank profits as they increase the spread between what banks earn by funding longer-term assets, such as loans, with shorter-term liabilities. The spread between long-term and short-term rates also expands during interest rate hikes because long-term rates tend to rise faster than short-term rates.
Non-banking financial institutions, including insurance companies, asset managers and brokerage firms, should also benefit. Rising rates act as a boon for insurance companies as they derive their investment income from investing premiums, which are received from policyholders in corporate and government bonds.
Yields and coupons on these bonds rise in response to a hike in Fed fund rates and bank interest rates. This enables life insurers to invest premiums at higher yields and earn more, expanding their profit margins. Not only investment income, which is an important component of insurers' top line, annuity sales should gain from a raised rate.
Brokerage firms and asset managers also advantage immensely from a rising rate environment since an increase in rates generally concurs during periods of economic strength and upbeat investor sentiments.
5 Solid Picks
Given the aforesaid factors, we have selected five solid stocks from these areas that boast a Zacks Rank #1 (Strong Buy) or 2 (Buy).
Top Stocks to Gain as Powell Backs Gradual Rate Hikes: BancFirst Corporation (BANF)
BancFirst (NASDAQ: BANF ) operates as the bank holding company for BancFirst that provides a range of commercial banking services to retail customers, and small to medium-sized businesses.
The company has a Zacks Rank #2. The Zacks Consensus Estimate for its current-year earnings has increased 3.1% in the last 60 days.
The company's projected growth rate for the current quarter is 35.8%, while the Banks - Southwest industry is expected to rise nearly 26%.
Top Stocks to Gain as Powell Backs Gradual Rate Hikes: 1st Constitution Bancorp (FCCY)
1st Constitution Bancorp (NASDAQ: FCCY ) operates as the bank holding company for 1st Constitution Bank that provides commercial and retail banking services in the central and northeastern New Jersey areas.
The company has a Zacks Rank #2. The Zacks Consensus Estimate for its current-year earnings has improved 5% in the last 60 days.
The company's projected growth rate for the current year is 37.7%, while the Banks - Northeast industry is projected to rise 21.4%.
Top Stocks to Gain as Powell Backs Gradual Rate Hikes: Hallmark Financial Services (HALL)
Hallmark Financial Services (NASDAQ: HALL ), through its subsidiaries, underwrites, markets, distributes, and services property/casualty insurance products to businesses and individuals in the United States.
The company has a Zacks Rank #1. The Zacks Consensus Estimate for its current-year earnings has jumped 10.7% in the last 60 days.
The company's projected growth rate for the current quarter is 322.2%, while the Insurance - Property and Casualty industry is likely to rise 75.1%.
Top Stocks to Gain as Powell Backs Gradual Rate Hikes: Athene Holding Ltd (ATH)
Athene Holding (NYSE: ATH ) reinsures, and acquires retirement savings products in the United States. It offers fixed deferred, immediate, and payout annuities.
The company has a Zacks Rank #1. The Zacks Consensus Estimate for its current-year earnings has soared 9.9% in the last 60 days.
The company's projected growth rate for the current quarter is 35.6%, while the Insurance - Life Insurance industry is expected to decline 8.1%.
Top Stocks to Gain as Powell Backs Gradual Rate Hikes: SEI Investments Company (SEIC)
SEI Investments (NASDAQ: SEIC ) is a publicly owned asset management holding company. The company has a Zacks Rank #2.
The Zacks Consensus Estimate for its current-year earnings has increased 0.6% in the last 60 days.
The company's projected growth rate for the current quarter is 20.6%, while the Financial - Investment Management industry is expected to decline 5.9%.
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