The likelihood of an interest rate hike by the Federal Reserve at the conclusion of its June 12-13 FOMC meeting is pretty high. The Fed funds rate is expected to tick up 25 basis points, with another hike or two anticipated this year. The possibility is backed by low unemployment, wage growth and rise in headline inflation.
With the Fed set to raise rates, we expect financials, technology, home improvement suppliers and even gold to benefit.
Outlook for June Hike
A blowout jobs report in May has raised the odds of a June rate hike. Around 223,000 new positions were created last month, which drove jobless rate down to levels around 50 years ago. The number of job openings now exceeds the number of job seekers for the first time since 2000.
In such a tight labor market, corporates have to raise wages to restrict other companies from poaching their workers. By the way, hourly pay went up 8 cents or 0.3% to $28.92 an hour last month. In the last 12 months, wages rose to 2.7% after remaining at 2.6% for three months at a stretch.
Higher pay means that the cost of borrowing for both consumers and businesses is going to go up soon. Higher inflation, in turn, leads to increased interest rates. Minutes from the Fed’s May 2 meeting had already shown that most of the policymakers have agreed that a strong economic outlook warranted a rate hike “soon.”
The U.S. economy is firing on all fronts, with consumer spending rebounding, business investments remaining firm and net exports showing solid strength. Thus, the annualized growth rate in the second quarter is expected at around 4%.
Fed to Stick With Gradual Rate Hikes
Traders in the federal funds futures market are now pricing in a 94% chance of a quarter-point rate increase this month. That’s no surprise, given the encouraging economic outlook.
Fed is also sticking to gradual rate hikes this year. After all, concerns over trade disputes and strains in emerging markets remain. The median estimates from economists see two more hikes this year, which matches the Fed’s own projections back in March, per a recent Bloomberg survey.
Financials to Win Big
With an overwhelming majority of observers seeing an imminent rate hike with more to follow this year, financials stands to gain. Banks are definitely the go-to rate trade. Higher interest rates will boost bank profits as they increase the spread between what banks earn by funding longer-term assets, such as loans, with shorter-term liabilities.
Insurers, by the way, 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 rise in interest rates. This enables life insurers to invest their premiums at higher yields and earn more investment income, expanding their profit margins.
An increase in rates generally concurs during periods of economic strength and upbeat investor sentiments, which also bodes well for brokerage firms and asset managers.
Technology & Home Improvement Stand to Gain
Other than the broader financial sector, technology firms stand to gain from a rate hike. Interest rates correlate with an economy that is getting stronger day by day and that could easily boost the bottom lines of smartphone makers like Apple Inc. AAPL.
Rising rates may also compel would-be home buyers to stop searching for houses and instead look for improving their existing ones. Thus, home improvement majors Lowe’s Cos. LOW and Home Depot HD stand to gain.
Rising Rates Don’t Affect Gold
There is a popular belief that a rise in interest rates makes bonds more alluring and thus money flows out of gold. But, a long-term trend shows that interest rates and gold prices don’t have such a negative correlation. Such a correlation over the past half century has been only 28%, which is not significant.
And why not? The price of gold is not a function of interest rates. It is more of a function of supply and demand in the long term. Rising rates, in fact, at times turns out to be bullish for gold as it is simply bearish for stocks like utilities and home construction, to name a few.
5 Solid Picks
Given the aforesaid positives, we have selected five solid stocks from these areas that boast a solid Zacks Rank #1 (Strong Buy) or 2 (Buy).
National Bank Holdings Corporation NBHC is a bank holding company operating full-service banking centers located in Colorado and the greater Kansas City region. NBHC currently has a Zacks Rank #1. In the last 60 days, two earnings estimates moved north, while one moved south for the current year. The Zacks Consensus Estimate for earnings has moved 12.2% up in the same time frame.
Blue Hills Bancorp, Inc. BHBK operates as the bank holding company for Blue Hills Bank. BHBK presently has a Zacks Rank #1. In the last 60 days, one earnings estimate moved up, while none moved down for the current year. The Zacks Consensus Estimate for earnings has risen 10.8% in the same period.
Loews Corporation L – a Zacks Rank #2 company – provides commercial property and casualty insurance. In the last 60 days, two earnings estimate moved north, while none moved south for the current year. The Zacks Consensus Estimate for earnings has moved 0.6% up in the same time frame. You can see the complete list of today’s Zacks #1 Rank stocks here.
LPL Financial Holdings Inc. LPLA provides an integrated platform of brokerage and investment advisory services. LPLA currently has a Zacks Rank #1. In the last 60 days, five earnings estimates moved north, while none moved south for the current year. The Zacks Consensus Estimate for earnings has moved 27.2% up in the same time frame.
Northern Dynasty Minerals Ltd. NAK acquires, explores for, and develops mineral properties including gold in the United States. NAK has a Zacks Rank #2. In the last 60 days, one earnings estimate moved north, while none moved south for the current year. The Zacks Consensus Estimate for earnings has moved 12% up in the same time period.
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Blue Hills Bancorp, Inc. (BHBK) : Free Stock Analysis Report
National Bank Holdings Corporation (NBHC) : Free Stock Analysis Report
The Home Depot, Inc. (HD) : Free Stock Analysis Report
Lowe's Companies, Inc. (LOW) : Free Stock Analysis Report
Apple Inc. (AAPL) : Free Stock Analysis Report
LPL Financial Holdings Inc. (LPLA) : Free Stock Analysis Report
Loews Corporation (L) : Free Stock Analysis Report
Northern Dynasty Minerals, Ltd. (NAK) : Free Stock Analysis Report
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