On Wednesday, Financial Select Sector SPDR (XLF) declined 3.7% following a fall in bond yields, which reached its lowest level since early February. Meanwhile, the sector recovered on Thursday, rising 0.2%, despite fall in key indexes following continued decline in tech stocks. It is quite likely that the recent slump in technology stocks was the reason for the fall in bond yields.
This means that Wednesday's selloff was a reaction to recent market events and not due to fundamentals. In fact, financials gained since the beginning of this year, on optimism surrounding strong economic expansion and steady job growth. Given the Fed's hawkish stance on rates, investing in financials continues to be a strong option going forward.
Amazon-Led Tech Stock Decline Weighs on Yields?
Per Axios, President Trump is somehow "obsessed" with Amazon.com, Inc. AMZN as the president is thinking of changing the tech giant's tax treatment in order to protect the interests of mom-and-pop retailers and other key players. Following this development, shares of Amazon fell 4.4% on Thursday and 7.3% in the last five trading days.
Shares of Nvidia Corporation NVDA and Tesla, Inc. TSLA declined 8% and 16.8%, respectively, in the last five trading days. Reuters reported that Nvidia will suspend all its self-driving tests for the time being after a self-sufficient car killed a woman in Arizona. Further, news came out that the U.S. National Transportation Safety Board will investigate a fatal crash involving one of Tesla's vehicles in California.
Additionally, Facebook, Inc FB fell 8% in the last five trading days following reports that analytics firm Cambridge Analytica easily collected personal information of more 50 million users without their consent. This raised privacy questions on the social networking giant's data management and protection from unauthorized third party access.
In the absence of other downside risks, it is quite likely that the tech slump weighed on 10-year Treasury bond yields, which fell to 2.77 on Wednesday. Bond yields reached its lowest settlement on Wednesday since Feb 6. Weak bond yields come as dark tidings for financials.
However, unlike last year when bond yields fell following the Trump government's failure to pass any key economic policies and lower inflation, this year's decline in yields was most likely due to the slump in technology. This means that the decline in financials is not a result of weak fundamental factors, but more a reaction to recent sector specific reverses.
Rising Rate Hike Prospects: Boon for Financials
Following its two-day Federal Open Market Committee (FOMC) policy meeting held onMar 20-21, the Fed raised its key interest rate by 0.25 points under the Fed's 16th Chairperson Jerome Powell. The central bank raised its key rate for the sixth time since 2015. Moreover, the Fed also expects two additional rate hikes this year and now three rate hikes in 2019 instead of two. The central bank projects economic growth at the rate of 2.7% in 2018, up from the previous expectation of 2.5%. Further, the growth rate is anticipated to be 2.4% in 2019 - higher than the previous forecast of 2.1%.
Rising rate hike chances is good news for financial companies including banks, money managers, insurance firms and brokerage companies. Banks benefit from a steep yield curve, as the spread between long-term and short-term rates widens. This is mainly because the potential rise in rates will enable banks to charge more for loans, leading to an increase in the spread between their lending rates and the rates paid on deposits.
Buy These 5 Financial Stocks
Given that the recent slump in tech stocks was the likely reason for faltering bond yields, we can say that prospects for financials are largely undiminished. The financial sector performed favorably in recent times following the Fed's interest rate hikes, better economic growth and Trump's latest economic policies. In fact, market watchers believe that this rally will continue if rates continue to march higher this year and even in 2019. The Financial Select Sector SPDR has advanced 14.4% in the last one-year period.
In this context, we have selected five stocks that are expected to gain following these developments. These stocks also flaunt a Zacks Rank #1 (Strong Buy) or 2 (Buy). You can see the complete list of today's Zacks #1 Rank stocks here .
City Holding Company CHCO is a provider of various banking, trust and investment management, and other financial solutions.
This West Virginia-based company has a Zacks Rank #2. The expected earnings growth rate for the current year is 15.99%. The Zacks Consensus Estimate for the current year has improved 2% over the last 30 days. City Holding has gained 11.4% in the past year.
BankUnited, Inc. BKU is a bank holding company for BankUnited, National Association that provides a range of banking services.
This Florida-based company has a Zacks Rank #2. The expected earnings growth rate for the current year is 20.09%. The Zacks Consensus Estimate for the current year has improved 1.3% over the last 30 days. BankUnited has gained 9.5% in the last year.
McGrath RentCorp MGRC is a business to business financial rental and leasing company.
This California-based company has a Zacks Rank #1. The expected earnings growth rate for the current year is 26.17%. The Zacks Consensus Estimate for the current year has improved 22.7% over the last 30 days. McGrath RentCorp has gained 60.6% in the past year.
M&T Bank Corporation MTB is a provider of commercial and retail banking services in the United States.
This New York-based company has a Zacks Rank #2. The expected earnings growth rate for the current year is 30.68%. The Zacks Consensus Estimate for the current year has improved 0.2% over the last 30 days. M&T Bank has gained 16.9% in a year.
American National Bankshares Inc. AMNB is a provider of financial services and products. It operates through two segments, Trust and Investment Services, and Community Banking.
This Virginia-based company has a Zacks Rank #2. The expected earnings growth rate for the current year is 25.60%. The Zacks Consensus Estimate for the current year has improved 0.8% over the last 30 days. American National Bankshares has gained 2.8% in a year's time.
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Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free reportM&T Bank Corporation (MTB): Free Stock Analysis ReportBankUnited, Inc. (BKU): Free Stock Analysis ReportAmazon.com, Inc. (AMZN): Free Stock Analysis ReportFacebook, Inc. (FB): Free Stock Analysis ReportTesla, Inc. (TSLA): Free Stock Analysis ReportAmerican National Bankshares, Inc. (AMNB): Free Stock Analysis ReportCity Holding Company (CHCO): Free Stock Analysis ReportMcGrath RentCorp (MGRC): Free Stock Analysis ReportNVIDIA Corporation (NVDA): Free Stock Analysis ReportTo read this article on Zacks.com click here.Zacks Investment Research