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5 Best Stocks to Buy on Powell Testimony

Tirthankar Chakraborty
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5 Best Stocks to Buy on Powell Testimony

Fed Chairman Powell indicates that the U.S. central bank plans to continue to hike rates at a pace of once every three months, at least for the time being.

Federal Reserve Board Chairman Jerome Powell made clear that the U.S. economy is picking up at a solid pace, justifying the interest rate hikes. Powell has more or less painted an encouraging picture of the economy, with the unemployment rate remaining at low levels and inflation hovering near the Fed’s preferred mark. The Fed, by the way, has hiked rates twice this year and has penciled in two more quarter-point moves.

With the Fed hiking rates and aiming for more increases this year, banks, insurers and brokerage firms stand to gain. Such institutions will see a ramp up in profits on steady interest rate hikes and stable economic conditions.

Powell Backs More Rate Hikes

Powell recently delivered his semiannual testimony to Congress. He indicated that the U.S. central bank plans to continue to hike rates at a pace of once every three months, at least for the time being.

Powell told the Senate Banking Committee that “with a strong job market, inflation close to our objective, and the risks to the economy roughly balanced, the FOMC believes that – for now – the best way forward is to keep gradually raising the federal funds rate.”

The jobless rate has remained at 4%, which many economists believe can be considered near to full employment. Powell, further, pointed to “good news” in the drop in unemployment rate for African Americans and Hispanics. President Donald Trump had earlier acknowledged that unemployment rate has been declining steadily since around 2010.

Powell, in the meantime, stated that inflation is close to the Fed’s 2% target for the first time in several years and that the economy is expanding at a “solid pace”.  The U.S. economy is projected to expand in the second quarter at an annual pace of nearly 4% after a 2.2% gain in the first three months of this year, economists say. This would put the economy in a solid position this year to meet or even beat 3% growth in gross domestic product, one of the primary aims of the government (read more: US GDP to Hit Elusive 3% Annual Growth in 13 Years: 5 Picks).

All in all, Powell expects the broader economy to grow at a faster pace than the U.S. central bank currently anticipates. This, in turn, reduces the risks of the economy to a large extent. Powell added that “rising after-tax incomes and optimism among households have lifted consumer spending in recent months” and “investment by businesses has continued to grow at a healthy rate.”  Moreover, he did oblige that strong global economy has boosted U.S. exports and manufacturing, while housing construction activities have improved, noticeably, from where it was a few years ago.

Fed Gets Slightly More Hawkish

The Fed has already raised its benchmark federal funds rate by a quarter percentage point to a range of 1.75% to 2% this year. The Fed’s dot plot, in fact, indicated that policy makers predict two additional rate hikes this year for a total of four increases instead of three as planned earlier.

By the end of this year, the median forecast for the federal funds rate stands at 2.4%, compared with the March forecast of 2.1%. Beyond this year, the policy-setting FOMC predicts that it will hike rates three times next year and one more time the following year to propel its benchmark rate up to 3.4% (read more: Fed Lifts Rates for the Second Time in 2018: Winners & Losers).

Who Stands to Gain From a Rate Hike?

Higher 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.

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.

Brokerage firms and asset managers also advantage enormously from an increasing rate environment since a hike in rates generally concurs during periods of economic strength and buoyant investor sentiments.

5 Solid Gainers

Given the aforesaid factors, we have selected five solid stocks from these areas that boast a 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.

East West Bancorp, Inc. EWBC operates as the bank holding company for East West Bank that provides a range of personal and commercial banking services. Currently, the company has a Zacks Rank 2 and a VGM Score of B. In the last 60 days, two earnings estimates moved north, while none moved south for the current year. The Zacks Consensus Estimate for earnings rose 0.9% in the same period. The company’s expected earnings growth rate for the current year is 35.6% compared with the Banks - West industry’s estimated rally of 25%.

SVB Financial Group SIVB is a diversified financial services company, providing various banking and financial products and services. The company currently has a Zacks Rank 2 and a VGM Score of B. In the last 60 days, four earnings estimates moved north, while one moved south for the current year. The Zacks Consensus Estimate for earnings rose 0.6% in the same period. The company’s expected earnings growth rate for the current year is 61.5% compared with the Banks - West industry’s projected rally of 25%.

The Progressive Corporation PGR provides personal and commercial auto insurance, residential property insurance, and other specialty property-casualty insurance and related services primarily in the United States. Currently, the company has a Zacks Rank 1 and a VGM Score of A. In the last 60 days, seven earnings estimates moved north, while none moved south for the current year. The Zacks Consensus Estimate for earnings rose 5.5% in the same period. The company’s expected earnings growth rate for the current year is 60.5% compared with the Insurance - Property and Casualty industry’s estimated rally of 22.8%. You can see the complete list of today’s Zacks #1 Rank stocks here.

Regional Management Corp. RM provides various loan products primarily to customers with limited access to consumer credit from banks, thrifts, credit card companies, and other traditional lenders. The company currently has a Zacks Rank 2 and a VGM Score of A. In the last 60 days, one earnings estimate moved up, while none moved down for the current year. The Zacks Consensus Estimate for earnings rose 0.9% in the same period. The company’s expected earnings growth rate for the current year is 39.4% compared with the Financial - Consumer Loans industry’s expected rally of 25%.

American Financial Group, Inc. AFG provides property and casualty insurance products in the United States. Currently, the company has a Zacks Rank 2 and a VGM Score of B. In the last 60 days, two earnings estimates moved north, while none moved south for the current year. The Zacks Consensus Estimate for earnings rose 0.9% in the same period. The company’s expected earnings growth rate for the current year is 29.9% compared with the Insurance - Property and Casualty industry’s estimated rally of 22.8%.

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SVB Financial Group (SIVB) : Free Stock Analysis Report
 
East West Bancorp, Inc. (EWBC) : Free Stock Analysis Report
 
Regional Management Corp. (RM) : Free Stock Analysis Report
 
The Progressive Corporation (PGR) : Free Stock Analysis Report
 
American Financial Group, Inc. (AFG) : Free Stock Analysis Report
 
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