Fed Chair Janet Yellen's first day testifying before the Congress solidified views that the Fed has adopted a more hawkish stance and an interest rate hike in March remains on the table. Citing an improving economy and solid labor market, she noted that waiting too long to hike rates would be imprudent as it might hamper the broader financial markets and dampen economic growth.
With rate hikes around the corner, investing in banks, insurance and brokerage houses will be judicious as the possibility of an increase in rates bodes well for these sectors.
Yellen's Hawkish Tone
Yellen left open the possibility of a rate hike as early as the central bank's next policy meeting in March. She reiterated some of the points made in the Fed's last policy meeting while indicating that she is concerned about the possibility of holding off rate hike for too long.
Yellen expects a gradual rate increase amid a modestly expanding economy and inflation that should touch the Fed's desired target rate of 2% in the near term. She said that "at our upcoming meetings, the Fed will evaluate whether employment and inflation are continuing to evolve in line with…expectations, in which case a further adjustment of the federal funds rate would likely be appropriate".
Jobs, Inflation Tick Up
Job additions increased significantly in January, with the economy adding 227,000 jobs, higher than 157,000 added during December. Additionally, this was the best monthly job rise since September. Wage gains are also likely to pick up momentum as minimum wage norms begin to take effect. The new administration's policies will also provide a fillip to wage increases. Lest we forget, the Fed policymakers haven't factored Trump's fiscal stimulus proposals. Trump had proposed to spend up to $1 trillion to upgrade the nation's collapsing roads, bridges and waterways, increase defense spending and implement massive tax cuts (read more: 5 Stocks to Buy on Big New Jobs Numbers ).
A measure of U.S. inflation expectations, in the meantime, rose for a second straight month in January to its highest level since mid-2015, according to a Federal Reserve Bank of New York survey. The survey of consumer expectations, an increasingly influential gauge of prices for the U.S. central bank, figured out that inflation expectations increased to 3% last month from 2.8% in December and 2.5% in November.
Expectations Elevate for March
As Yellen hinted at a March rate hike, Fed funds futures point to an 18% chance of a rise next month, up from 13% on Feb 13. Odds of a rate hike in May inched up to almost 41% from 36.5%, while it touched about 50% in June.
According to calculations on federal funds futures, expectations that the U.S. central bank will tighten policy by 75bp this year, through three 25bp shifts, increased to 34%. San Francisco Fed President John Williams recently suggested that a March increase is possibile, while Chicago Fed chief Charles Evans, typically a "dove" projected two rate hikes this year, but, admitted that Fed could be comfortable with three.
Financials Lead the Gains: 5 Solid Choices
As Yellen signaled that the central bank could gradually raise interest rates sooner rather than later, financial stocks lead the gains, with the Financial Select Sector SPDR (XLF) increasing 1.2% on Feb 14. The financial sector has rallied more than 20% since the November election, and 4.2% this month alone.
Bank stocks rallied on Yellen's hawkish comments on interest rates. Higher longer-term 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. Bank of America BAC rose 2.8% on Feb 14 to its best levels since Nov 2008, while Wells Fargo WFC , Citigroup C and JPMorgan Chase JPM went up 1.6%, 1.5% and 1.6%, respectively, scaling an all-time high (read more: 5 Incredible Bank Stocks to Buy on the Dip ).
Shares of non-banking financial institutions including insurance companies, asset managers and brokerage firms also moved north. A rise in rates will enable insurance firms to invest in higher yielding government securities, thereby leading to greater returns, while brokerage firms and asset managers benefit immensely from rising-rate environments since an increase in rates generally concur with periods of economic strength and investor enthusiasm (read more: Which Investments Could Benefit From Rising Interest Rates? ).
Given the aforementioned benefits, we have selected five sturdy stocks from these areas that boast a solid Zacks Rank #1 (Strong Buy) or 2 (Buy). The search was also narrowed down with a VGM score of 'A' or 'B'. Here V stands for Value, G for Growth and M for Momentum and the score is a weighted combination of these three metrics. Such a score allows you to eliminate the negative aspects of stocks and select winners.
Bank of America Corporation provides banking and financial products and services for individual consumers, small and middle-market businesses, institutional investors, large corporations, and governments. The company's has a Zacks Rank #2 and a VGM score of 'B'. Bank of America's expected growth rate for this year is 16.2%, more than the industry's return of 10%. The Zacks Consensus Estimate for its current year earnings rose 6.1% over the last 60 days.
Eagle Bancorp Montana, Inc.EBMT provides various retail banking products and services in Montana. The company has a Zacks Rank #1 and a VGM score of 'A'. Eagle Bancorp Montana's expected growth rate for this year is 8.3%, higher than the industry's return of 5.2%. The Zacks Consensus Estimate for its current year earnings increased 2.1% over the last 60 days.
Principal Financial Group, Inc.PFG provides retirement, asset management, and insurance products and services. The company has a Zacks Rank #2 and a VGM score of 'B'. Principal Financial Group's expected growth rate for this year is 7.5%, more than the industry's return of 3.2%. The Zacks Consensus Estimate for its current year earnings advanced 0.8% over the last 60 days. You can see the complete list of today's Zacks #1 Rank stocks here.
Selective Insurance Group, Inc.SIGI provides insurance products and services in the U.S. The company has a Zacks Rank #1 and a VGM score of 'B'. Selective Insurance Group's expected growth rate for this year is 10.9%, in contrast the industry is projected to decline 0.2%. The Zacks Consensus Estimate for its current year earnings increased 8.9% over the last 60 days.
Lazard LtdLAZ operates as a financial advisory and asset management firm that has long specialized in crafting solutions to the complex financial and strategic challenges of their clients. The company has a Zacks Rank #2 and a VGM score of 'B'. Lazard's expected current and next quarter growth rates are pegged at 40% and 21.3%, respectively. The Zacks Consensus Estimate for its current year earnings increased 2.3% over the last 60 days.
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