The Fed’s economic outlook after a two-day meeting of its policymaking committee remained upbeat, setting the stage for a March rate hike. Uptick in household outlays and business fixed investments strengthened the economy. Fed officials also expect inflation to move up to its desired target range this year.
Many investors opine that the recent passage of the Republican tax overhaul policy, a weaker exchange rate and jump in oil prices will compel the Fed to raise rates at a steady pace this year to keep the economy from getting overheated. This calls for investing in banks, insurance and brokerage houses as such institutions will see a ramp up in profits on steady interest rate hikes and stable economic conditions.
Fed on Track to Raise Rates in March
The Fed, as expected, kept its benchmark short-term interest rate unchanged at 1.25% to 1.5%. The Fed had hiked rates by a quarter percentage point last December. Nevertheless, Fed policymakers reckon three rate hikes this year, setting the stage for an imminent increase in March under Jerome Powell. The two-day policy meeting that concluded on Jan 31 was last administered by Fed Chair Janet Yellen, who will be succeeded by Powell.
The Fed stuck to its policy of a gradual rate hike without disrupting markets. Fed fund futures indicate that there is a rough 75% chance that the central bank will hike rates again in March, per CME Group. Markets, in fact, are pricing in more than a 90% chance of an interest rate hike in March, according to Bank of America Corporation BAC and Jefferies.
A March rate hike has been on the table as the Fed believes economic growth has been solid and inflation will increase more than anticipated. Consumers and businesses had already helped the U.S. economy expand at a healthy pace for a third straight quarter late last year.
Solid Economic Growth
The nation’s GDP increased at a seasonally adjusted annual rate of 2.6% in the final three months of 2017 following gains in the previous two quarters of more than 3%, per the “advance” estimate released by the Bureau of Economic Analysis. This marked the economy’s strongest stretch of growth since the expansion started in mid-2009.
Consumer spending, the main engine of the economy, grew 3.8% over the quarter after a 2.2% gain in the third quarter. Consumer outlays, thus, registered the fastest pace of growth in the fourth quarter in almost two years. Consumers are, largely, benefitting from a low unemployment level and rise in income. Companies, in the meanwhile, ramped up spending in the fourth quarter by 6.8%. A resurgent global economy helped businesses step up their outlays.
Pick-Up in Inflation
Policy makers have been optimistic that inflation will hit the desired target of 2% in the near term. The Fed’s preferred gauge of inflation is currently at 1.7%, close to its 2% target.
Further, the Fed in a post-meeting statement mentioned that inflation is “expected to move up” in the next 12 months. The Fed added that all inflation related measures “have increased in recent months,” something that they have denied in their December statement.
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. The spread between long-term and short-term rates also expands during interest rate hikes because long-term rates tend to rise faster than short-term rates.
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 their premiums at higher yields and earn more, expanding their profit margins. Not only investment income, which is an important component of insurers’ top line, annuity sales should gain from a raised rate.
Brokerage firms and asset managers also advantage immensely from a rising rate environment since an increase in rates generally concurs during periods of economic strength and upbeat investor sentiments.
5 Solid Picks
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 EWBC operates as the holding company for East West Bank that provides a range of personal and commercial banking services. The company has a Zacks Rank #2 and a VGM Score of B. The Zacks Consensus Estimate for its current-year earnings rose 15.4% in the last 90 days. The stock’s expected earnings growth rates for the current and next quarters are 14.8% and 33.3%, respectively. East West Bancorp’s projected growth rate for the current year is 27.8%, higher than the industry’s gain of 22.1%.
The First Bancshares FBMS operates as the holding company for The First, A National Banking Association that provides commercial and retail banking services. The stock has a Zacks Rank #2 and a VGM Score of B. The Zacks Consensus Estimate for its current-year earnings increased 11.7% in the last 90 days. The company’s expected earnings growth rate for the current quarter is 43.2%. First Bancshares’ projected growth rate for the current year is 30.7%, higher than the industry’s rally of 26.7%.
American Equity Investment Life Holding Company AEL develops and sells fixed index and fixed rate annuity products in the United States. The stock sports a Zacks Rank #1 and a VGM Score of A. The Zacks Consensus Estimate for its current-year earnings scaled 13.6% in the last 90 days. The company’s expected earnings growth rates for the current and next quarters are 6.4% and 7.6%, respectively. American Equity Investment’s projected growth rate for the current year is more than 100%, higher than the industry’s gain of 17.9%. You can see the complete list of today’s Zacks #1 Rank stocks here.
Artisan Partners Asset Management APAM — a Zacks Rank #1 company — is a publicly owned investment manager. Artisan Partners Asset Management has a VGM Score of B. The Zacks Consensus Estimate for its current-year earnings increased 1.3% in the last 90 days. The company’s expected earnings growth rates for the current and next quarters are 61.9% and 105.4%, respectively. Artisan Partners Asset Management’s projected growth rate for the current year is 54.1%, higher than the industry’s rally of 13.7%.
OM Asset Management OMAM is a privately owned asset management holding company. The company has a Zacks Rank #2 and a VGM Score of A. The Zacks Consensus Estimate for its current-year earnings advanced 0.6% in the last 90 days. The stock’s expected earnings growth rates for the current and next quarters are 21.2% and 35.3%, respectively. OM Asset Management’s projected growth rate for the current year is 30.6%, higher than the industry’s gain of 13.7%.
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Bank of America Corporation (BAC) : Free Stock Analysis Report
The First Bancshares, Inc. (FBMS) : Free Stock Analysis Report
East West Bancorp, Inc. (EWBC) : Free Stock Analysis Report
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OM Asset Management PLC (OMAM) : Free Stock Analysis Report
American Equity Investment Life Holding Company (AEL) : Free Stock Analysis Report
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