On May 16, yields on several U.S. sovereign bonds spiked following the release of a series of strong economic data. Investors dumped safe-haven government bonds and opted for risky assets like equities, which resulted in a Wall Street rally for three days.
As a result of these developments, the stock prices of several major banks surged. A hike in interest rate will raise the cost of funds, which in turn will enable the financial sector, especially banks, to widen the spread between longer-term assets, such as loans, with shorter-term liabilities, thus boosting the sector’s profits.
U.S. Government Bond Yields Soar
On May 16, the yield on benchmark 10-year U.S. Treasury Note increased to 2.407%. The yield on long-term 30-year U.S. Treasury Note climbed to 2.842%. Following the hike in sovereign bond yields, S&P Financials Select Sector SPDR (XLF) rose 1%. Year to date, XLF is up 13.6%. Moreover, the SPDR S&P Regional Banking ETF (KRE), the SPDR S&P Bank ETF (KBE) and the KBW Nasdaq Bank Index (BKX) gained 1.1% each on May 16.
Strong Economic Data
The Department of Labor reported that Initial jobless claims declined 16,000 to a seasonally adjusted 212,000 in the week ended May 11. The data was lower than the consensus estimate of 221,000 and unemployment benefit claims of 228,000 for the week ended May 4. The sharp decline in jobless claims indicates robustness of the U.S. labor market.
The National Association of Home Builders reported that housing starts or construction of new buildings grew 5.7% in April to a seasonally adjusted annual rate of 1.235 million, surpassing the consensus estimate of 1.21 million. The data for March was revised to 1.168 million from 1.139 million reported earlier.
Meanwhile permits to build new houses rose nearly 1% in April to 1.296 million, beating the consensus estimate of 1.29 million. The data for March was also revised upward to 1.288 million from 1.269 million reported earlier.
The Philadelphia Fed manufacturing index in May came in at 16.6 in May, a massive gain from the reading of 8.5 in April. The index was the highest in four months in May. Notably, any reading above zero indicates improving conditions. The employment index grew to 18.2, highest in five months. The prices index was at 17.5, lowest in 17 months.
In the first quarter of 2019, the U.S. economy grew an astonishing 3.2% despite the 35-day long partial government shutdown and extreme cold weather. The momentum is likely to continue for the rest of 2019.
Moreover, first-quarter 2019 total earnings and revenues of the financial sector within the S&P 500 Index are up respectively 2.7% and 8.2%, year over year. Notably, banks constitute the majority of the financial sector.
Additionally, massive reduction of corporate tax rate in 2018 and various large IPOs of 2019 will improve the financials of U.S. banks.
Our Top Picks
At this stage, it will be prudent to invest in banking stocks with a favorable Zacks Rank and strong growth potential. We have narrowed down our search to five stocks, which have moved higher so far in 2019 and still have upside left. Each of our picks carries a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
The chart below shows price performance of our five picks year to date.
First Business Financial Services Inc. FBIZ provides commercial banking products and services for small and medium-sized businesses, business owners, business executives, professionals and high net worth individuals. The company has expected earnings growth of 22% for the current year. The Zacks Consensus Estimate for the current year has improved by 10.7% over the last 30 days. The stock has surged 22.1% year to date.
Popular Inc. BPOP is a diversified, publicly owned holding company providing various retail, mortgage and commercial banking products and services. The company has expected earnings growth of 38.2% for the current year. The Zacks Consensus Estimate for the current year has improved by 7% over the last 30 days. The stock has surged 17.6% year to date.
Metropolitan Bank Holding Corp. MCB provides a range of business, commercial and retail banking products and services to small businesses, middle-market enterprises, public entities and individuals in the New York metropolitan area. The company has expected earnings growth of 23.9% for the current year. The Zacks Consensus Estimate for the current year has improved by 13.1% over the last 30 days. The stock has surged 33.7% year to date.
The Bancorp Inc. TBBK offers a range of deposit products and services, including checking, savings, money market, commercial and retirement accounts. The company has expected earnings growth of 39.1% for the current year. The Zacks Consensus Estimate for the current year has improved by 9.1% over the last 30 days. The stock has surged 23.6% year to date.
OP Bancorp OPBK offers demand, checking, savings, money market, and time deposit accounts, as well as certificate of deposits in California. The company has expected earnings growth of 16.9% for the current year. The Zacks Consensus Estimate for the current year has improved by 22.4% over the last 30 days. The stock has surged 17.9% year to date.
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First Business Financial Services, Inc. (FBIZ) : Free Stock Analysis Report
The Bancorp, Inc. (TBBK) : Free Stock Analysis Report
Popular, Inc. (BPOP) : Free Stock Analysis Report
OP Bancorp (OPBK) : Free Stock Analysis Report
Metropolitan Bank Holding Corp. (MCB) : Free Stock Analysis Report
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