The majority of Fed officials have kept a June rate hike on the table. And the conditions that they have laid out – improvement in second-quarter economic growth, labor market strengthening and progress on inflation -- are all beginning to fall into place.
Industrial production, retail sales and the housing market have improved significantly from the first quarter. Wage growth has improved remarkably, while the unemployment rate continues to hover near the Fed’s target of full employment. Inflation rose at the fastest pace in three years in April, making a hike very likely this year even if it’s not in June. Hence, it will be prudent to invest in financial mutual funds.
Odds of a June Rate Hike Rise
Per the minutes of the Federal Open Market Committee (FOMC) Apr 26-27 policy meeting on Wednesday, most of the Fed’s officials are open to a rate hike in June, provided the economy shows signs of life in the second quarter. They will also keep an eye on whether the labor market is continuing to strengthen and the inflation rate is progressing toward the Fed’s target rate of 2%.
After this relative hawkish stance of the Fed, chances of an interest rate hike in June rose to 34% from 15% on Tuesday and a meager 4% on Monday, according to CME Group’s FedWatch tool. This rise in possibility of a rate hike turned out to be significant, especially if we consider that the odds of a June rate hike was almost zero in April. Investors are also betting on a 79% chance of a Fed rate hike at least once this year, up from an earlier expectation of about 60%.
William Dudley, the president of the New York Fed, said that if the economy rebounds from the weak first quarter then a summer rate hike is a “reasonable expectation.” He added that the broader markets now see a 60% chance of a rate hike in either June or July. Richmond Fed President Jeffrey Lacker also defended the Fed’s hawkish stance. He said that the case for a June rate hike was pretty strong.
Economic Data Encouraging
After lackluster growth in the first quarter, the U.S. economy seems to have picked up steam. Industrial production in the U.S. climbed at the fastest pace in more than a year in April, led by advances in utilities and factory output. This is a telltale sign that the country’s manufacturing slump is probably over and the economy has started the second quarter on a solid note.
Retail sales, on the other hand, have picked up in April following dreary growth in the first three months of this year. Gains were robust, with auto dealers, gas stations and Internet retailers gaining the most. A steady rise in income levels is also expected to lift consumer spending, which will eventually boost retail sales in the future. Moreover, consumer confidence in the U.S. has already gained strength in May.
On the housing front, a couple of reports released this month indicate that the housing market has picked up pace at the end of the first quarter. Notable among them are housing starts and building permits, which saw an uptick in April.
Top 4 Financial Mutual Funds to Invest In
The minutes from the Fed’s policy meeting in April showed that several Fed officials are keen on a June rate hike if the U.S. economy strengthens in the second quarter. And as discussed above, the economy has certainly improved since the first quarter. Meanwhile, inflation is gradually moving higher, with the consumer price index shooting up to a seasonally adjusted 0.4% last month, the biggest gain since Feb 2013. The labor market also continues to post solid gains in payrolls that reduced the unemployment rate to 5%, which is close to the Fed’s estimate of full employment.
San Francisco Fed President John Williams said that the recent economic data, which shows moderate growth, makes “a good case for rate increases in the next few meetings, not just June.” Atlanta Fed President Dennis Lockhart also said that the recent “encouraging” inflation data showed growth in the U.S. economy. He added that “if the data continue to be encouraging,” he would “certainly entertain some policy move in June.”
Given these positive trends, chances of a rate hike are very much in the cards this year. In fact, odds of a June rate hike have increased considerably, thanks to the Fed minutes. These calls for investing in financial mutual funds. Financial companies including banks, insurers and brokerage firms are likely to be one of the biggest beneficiaries of the rate hike.
Here we have selected four financial mutual funds that boast a Zacks Mutual Fund Rank #1 (Strong Buy) or #2 (Buy), have positive 3-year and 5-year annualized returns, offer minimum initial investment within $5000 and carry a low expense ratio.
Funds have been selected over stocks, since funds reduce transaction costs for investors. Funds also diversify the portfolio without the numerous commission charges that stocks need to bear.
JHancock Regional Bank A (FRBAX - Free Report) invests the majority of its net assets in equity securities of regional banks and lending companies. FRBAX’s 3-year and 5-year annualized returns are 10.4% and 11.6%, respectively. Annual expense ratio of 1.26% is lower than the category average of 1.48%. FRBAX has a Zacks Mutual Fund Rank #2.
Fidelity Select Insurance Portfolio (FSPCX - Free Report) invests a major portion of its assets in securities of companies engaged in selling and distribution of property, casualty, life or health insurance. FSPCX’s 3-year and 5-year annualized returns are 11.3% and 12.9%, respectively. Annual expense ratio of 0.8% is lower than the category average of 1.48%. FSPCX has a Zacks Mutual Fund Rank #1.
Fidelity Select Brokerage & Investment Management (FSLBX - Free Report) invests a large portion of its assets in securities of companies engaged in stock and commodity brokerage. FSLBX’s 3-year and 5-year annualized returns are 0.7% and 5.6%, respectively. Annual expense ratio of 0.78% is lower than the category average of 1.48%. FSLBX has a Zacks Mutual Fund Rank #2.
Franklin Mutual Financial Services A (TFSIX - Free Report) invests the majority of its net assets in securities of financial services companies. TFSIX’s 3-year and 5-year annualized returns are 8.1% and 8.2%, respectively. Annual expense ratio of 1.41% is lower than the category average of 1.48%. TFSIX has a Zacks Mutual Fund Rank #2.
About Zacks Mutual Fund Rank
By applying the Zacks Rank to mutual funds, investors can find funds that not only outpaced the market in the past but are also expected to outperform going forward. Pick the best mutual funds with the help of Zacks Rank.