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The federal funds rate was raised by a quarter percentage point, increasing the cost of borrowing for consumers and businesses, to keep the economy from getting overheated. Fed officials also maintained their outlook for one more hike this year despite softening in inflation. At the same time, they expect to gradually reduce the Fed’s massive holdings of Treasury and agency securities over a number of years.
Banks, insurance and brokerage houses will see a ramp up in profits on an interest rate hike, while a gradual approach toward the balance sheet normalization program won’t slow down the economy radically. As rate hikes are particularly positive for the financial sector, investing in the same seems judicious.
Fed Bumps Rates Up Despite Softening Inflation
Policy makers raised benchmark lending rate for the third time in six months to 1.25% from 1%. They also stuck to their plans of another hike this year and issued forecasts that showed three more quarter point rate increases next year, similar to the projection issued in March. The Fed acknowledged that job gains remained solid on an average since the beginning of the year, with the unemployment rate dropping to a 16-year low in May. In fact, economic growth projections for this year moved to 2.2% from 2.1% as per the FOMC members.
At the same time, the committee is concerned about weak inflation. The cost of goods and services for American consumers fell in May for the second time in three months as inflation receded from a recent high-water mark. Annual inflation continues to lag the Fed’s target of 2%. In fact, such developments have prompted FOMC members to cut their median projection for inflation to 1.6% this year from 1.9% issued in March.
Yellen Remains Hopeful
Even though inflation has stubbornly stayed lower than the Fed’s desired target, Fed Chairwoman Janet Yellen expects inflation to hit the desired 2% at least next year. She believes that the declining prices are a temporary blip that will soon be forgotten. She mentioned that the recent decline is coming from areas such as telecom as war among mobile phone service providers has led to lower prices for cellphones.
Yellen emphasized that the labor market looks quite healthy, justifying Fed’s decision to raise rates for the second time this year and fourth time in 18 months. In other words, the jobs side would offer enough impetus to Yellen and her colleagues to raise rates steadily, while the inflation side may take a back seat.
Fed to Unwind Massive $4.5 Trillion Balance Sheet
The Fed also moved toward a consensus on a proposal to gradually unwind the massive balance sheet built up over the course of the asset buying program that was the core of Fed’s quantitative strategy. During the financial crisis, the Fed built up around $4.5 trillion in Treasury and mortgage backed securities on its balance sheet to counter a complete collapse of the financial system.
Now, nearly after a decade, the Fed has laid out a plan for shrinking the size of balance sheet. The basic idea is to stop the Fed from reinvesting the principal of securities when they mature. The Fed expects to have a balance sheet “appreciably below that seen in recent years but larger than before the financial crisis”. Thanks to the slow and cautious approach toward unwinding the balance sheet, the economy will remain stable and investors shouldn’t worry about the ill effects of too many economic tightening measures.
These Sectors Hail Aggressive Fed
Higher interest rates, in the meanwhile, boost bank profits by increasing 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.
Shares of Citigroup (C - Free Report) and Goldman Sachs (GS - Free Report) rebounded in afternoon trading on Jun 14 following the Fed’s interest rate hike and hawkish outlook. Lest we forget, the House of Representatives voted along party lines to erase a number of core financial regulations put in place after the 2008 financial crisis. The Republican bill, better known as the Financial Choice Act, would free up banks by giving more power to banking authorities and spurring lending activities (read more: 5 Bank Stocks to Buy as House Cuts Dodd-Frank Reforms).
Non-banking financial institutions, including insurance companies, 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 investment income, expanding profit margins. Not only investment income, which is an important component of insurers’ top line, annuity sales should gain from a higher rate environment.
Brokerage firms and asset managers also gain immensely from a rising rate environment since an increase in rates generally concurs during periods of economic strength and upbeat investor sentiments.
5 Best Winners
Banking on the aforesaid benefits, we have selected five solid stocks from these areas that boast a Zacks Rank #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. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Home Bancorp, Inc. (HBCP - Free Report) is a bank holding company for Home Bank, N.A. It is engaged in attracting deposits from the general public and using those funds to invest in loans and securities. Home Bancorp has a VGM score of ‘B’. The company is expected to return 12.8% this year, more than the Banks - Southeast industry’s 11.8%. Home Bancorp has outperformed the industry over the last one-year period (+47.8% vs. 47.2%).
Preferred Bank (PFBC - Free Report) is a commercial bank. The bank provides deposit services as well as real estate finance, commercial loans and trade finance to small and mid-sized businesses and their owners, entrepreneurs, real estate developers and investors, professionals and high net worth individuals. Preferred Bank has a VGM score of ‘B’. The company is expected to return 19.2% this year, higher than the Banks - West industry’s 11.6%. Preferred Bank has outperformed the industry over the last one year (+70.2% vs. 42.3%).
Cna Financial Corp (CNA - Free Report) provides commercial property and casualty insurance products, primarily in the United States. It operates through Specialty, Commercial, International, Life & Group Non-Core, and Corporate & Other Non-Core segments. Cna Financial has a VGM score of ‘B’. The company is expected to return 13.7% this year, more than the Insurance - Property and Casualty industry’s 3%. Cna Financial has outperformed the industry over the last one-year period (+56% vs. 20.5%).
Health Insurance Innovations Inc operates as a developer, distributor, and administrator of cloud-based individual health and family insurance plans, and supplemental products in the United States. The company has a VGM score of ‘B’. It is expected to return 30.4% this year, better than the Insurance - Life Insurance industry’s 12%. Health Insurance Innovations has outperformed the industry over the last one-year period (+451.4% vs. 45%).
Artisan Partners Asset Management Inc (APAM - Free Report) is an investment management company. It manages separate client-focused equity and fixed income portfolios. Artisan Partners Asset Management has a VGM score of ‘A’. The company is expected to return 46.1% this year, more than the Financial - Investment Management industry’s 6.3%. Artisan Partners Asset Management has outperformed the industry in the last three months (+6.2% vs. 3%).
3 Stocks to Ride a 588% Revenue Explosion
At Zacks, we're mostly focused on short-term profit cycles, but the hottest of all technology mega-trends is starting to take hold...
By last year, it was already generating $8 billion in global revenues. By 2020, it's predicted to blast through the roof to $47 billion. Famed investor Mark Cuban says it will produce ""the world's first trillionaires,"" but that should still leave plenty of money for those who make the right trades early. See Zacks' Top 3 Stocks to Ride This Space >>
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Fed Hikes Rate, Sets Asset Plan: 5 Top Gainers
The federal funds rate was raised by a quarter percentage point, increasing the cost of borrowing for consumers and businesses, to keep the economy from getting overheated. Fed officials also maintained their outlook for one more hike this year despite softening in inflation. At the same time, they expect to gradually reduce the Fed’s massive holdings of Treasury and agency securities over a number of years.
Banks, insurance and brokerage houses will see a ramp up in profits on an interest rate hike, while a gradual approach toward the balance sheet normalization program won’t slow down the economy radically. As rate hikes are particularly positive for the financial sector, investing in the same seems judicious.
Fed Bumps Rates Up Despite Softening Inflation
Policy makers raised benchmark lending rate for the third time in six months to 1.25% from 1%. They also stuck to their plans of another hike this year and issued forecasts that showed three more quarter point rate increases next year, similar to the projection issued in March. The Fed acknowledged that job gains remained solid on an average since the beginning of the year, with the unemployment rate dropping to a 16-year low in May. In fact, economic growth projections for this year moved to 2.2% from 2.1% as per the FOMC members.
At the same time, the committee is concerned about weak inflation. The cost of goods and services for American consumers fell in May for the second time in three months as inflation receded from a recent high-water mark. Annual inflation continues to lag the Fed’s target of 2%. In fact, such developments have prompted FOMC members to cut their median projection for inflation to 1.6% this year from 1.9% issued in March.
Yellen Remains Hopeful
Even though inflation has stubbornly stayed lower than the Fed’s desired target, Fed Chairwoman Janet Yellen expects inflation to hit the desired 2% at least next year. She believes that the declining prices are a temporary blip that will soon be forgotten. She mentioned that the recent decline is coming from areas such as telecom as war among mobile phone service providers has led to lower prices for cellphones.
Yellen emphasized that the labor market looks quite healthy, justifying Fed’s decision to raise rates for the second time this year and fourth time in 18 months. In other words, the jobs side would offer enough impetus to Yellen and her colleagues to raise rates steadily, while the inflation side may take a back seat.
Fed to Unwind Massive $4.5 Trillion Balance Sheet
The Fed also moved toward a consensus on a proposal to gradually unwind the massive balance sheet built up over the course of the asset buying program that was the core of Fed’s quantitative strategy. During the financial crisis, the Fed built up around $4.5 trillion in Treasury and mortgage backed securities on its balance sheet to counter a complete collapse of the financial system.
Now, nearly after a decade, the Fed has laid out a plan for shrinking the size of balance sheet. The basic idea is to stop the Fed from reinvesting the principal of securities when they mature. The Fed expects to have a balance sheet “appreciably below that seen in recent years but larger than before the financial crisis”. Thanks to the slow and cautious approach toward unwinding the balance sheet, the economy will remain stable and investors shouldn’t worry about the ill effects of too many economic tightening measures.
These Sectors Hail Aggressive Fed
Higher interest rates, in the meanwhile, boost bank profits by increasing 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.
Shares of Citigroup (C - Free Report) and Goldman Sachs (GS - Free Report) rebounded in afternoon trading on Jun 14 following the Fed’s interest rate hike and hawkish outlook. Lest we forget, the House of Representatives voted along party lines to erase a number of core financial regulations put in place after the 2008 financial crisis. The Republican bill, better known as the Financial Choice Act, would free up banks by giving more power to banking authorities and spurring lending activities (read more: 5 Bank Stocks to Buy as House Cuts Dodd-Frank Reforms).
Non-banking financial institutions, including insurance companies, 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 investment income, expanding profit margins. Not only investment income, which is an important component of insurers’ top line, annuity sales should gain from a higher rate environment.
Brokerage firms and asset managers also gain immensely from a rising rate environment since an increase in rates generally concurs during periods of economic strength and upbeat investor sentiments.
5 Best Winners
Banking on the aforesaid benefits, we have selected five solid stocks from these areas that boast a Zacks Rank #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. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Home Bancorp, Inc. (HBCP - Free Report) is a bank holding company for Home Bank, N.A. It is engaged in attracting deposits from the general public and using those funds to invest in loans and securities. Home Bancorp has a VGM score of ‘B’. The company is expected to return 12.8% this year, more than the Banks - Southeast industry’s 11.8%. Home Bancorp has outperformed the industry over the last one-year period (+47.8% vs. 47.2%).
Preferred Bank (PFBC - Free Report) is a commercial bank. The bank provides deposit services as well as real estate finance, commercial loans and trade finance to small and mid-sized businesses and their owners, entrepreneurs, real estate developers and investors, professionals and high net worth individuals. Preferred Bank has a VGM score of ‘B’. The company is expected to return 19.2% this year, higher than the Banks - West industry’s 11.6%. Preferred Bank has outperformed the industry over the last one year (+70.2% vs. 42.3%).
Cna Financial Corp (CNA - Free Report) provides commercial property and casualty insurance products, primarily in the United States. It operates through Specialty, Commercial, International, Life & Group Non-Core, and Corporate & Other Non-Core segments. Cna Financial has a VGM score of ‘B’. The company is expected to return 13.7% this year, more than the Insurance - Property and Casualty industry’s 3%. Cna Financial has outperformed the industry over the last one-year period (+56% vs. 20.5%).
Health Insurance Innovations Inc operates as a developer, distributor, and administrator of cloud-based individual health and family insurance plans, and supplemental products in the United States. The company has a VGM score of ‘B’. It is expected to return 30.4% this year, better than the Insurance - Life Insurance industry’s 12%. Health Insurance Innovations has outperformed the industry over the last one-year period (+451.4% vs. 45%).
Artisan Partners Asset Management Inc (APAM - Free Report) is an investment management company. It manages separate client-focused equity and fixed income portfolios. Artisan Partners Asset Management has a VGM score of ‘A’. The company is expected to return 46.1% this year, more than the Financial - Investment Management industry’s 6.3%. Artisan Partners Asset Management has outperformed the industry in the last three months (+6.2% vs. 3%).
3 Stocks to Ride a 588% Revenue Explosion
At Zacks, we're mostly focused on short-term profit cycles, but the hottest of all technology mega-trends is starting to take hold...
By last year, it was already generating $8 billion in global revenues. By 2020, it's predicted to blast through the roof to $47 billion. Famed investor Mark Cuban says it will produce ""the world's first trillionaires,"" but that should still leave plenty of money for those who make the right trades early. See Zacks' Top 3 Stocks to Ride This Space >>