Treasury yields have been on a tear in recent week with the 10-year yield almost touching the important 3% threshold, which caused jitters in the financial stock market in 2013. Notably, the 10-year Treasury yields hit its highest level in more than four years at 2.998% on Apr 23, pushing the gap or spread to German bonds to the widest in 29 years. Meanwhile, the two-year yields rose to high of 2.483% — the highest since September 2008.
Worries about growing supply of government debt and inflationary pressures from the recent spike in commodity prices, especially oil and metals, triggered the rise. Per the latest CME's FedWatch tracking tool, the market is projecting 50% chances of a total of four interest rate hikes this year. This compares with 33% probability a month ago and less than 40% late last week.
A Reason to Worry
Higher rates would attract more capital to the country, thereby boosting the U.S. dollar against the basket of other currencies. This would leave a huge impact on commodity-linked investments, implying that a rising rate environment will hurt a number of segments. Higher rates would result in tighter lending conditions and curtail consumer spending on a wide range of products like cars and houses. This will in turn dent profitability across various segments. Further, businesses will also face higher loan rates over time.
A rising rate environment is highly beneficial to cyclical sectors like financial, consumer discretionary, technology and industrials.
In particular, banks are at the most advantageous position as they seek to borrow money at short-term rates and lend at long-term rates. If interest rates rise, banks would be able to earn more on lending and pay less on deposits. This would expand net margins and bolster banks’ profits. Also, insurance companies are able to earn higher returns on their investment portfolio of longer-duration bonds.
Higher interest rates usually indicate a healthy economy, which in turn leads to greater consumer power. An improving economy coupled with a surging stock market will continue to add wealth effect, resulting in higher consumer confidence, and making the consumer discretionary sector tempting to investors amid higher yields. The technology sector should benefit as rising interest rates usually correlate with an economy that is gaining strength and is expected to grow at a faster pace, leading to increased IT spending.
While there are several compelling options in these sectors, a few of them have potentially superior weighting methodologies with a solid Zacks Rank #1 (Strong Buy) or 2 (Buy), a Growth Score of B or better and a projected this year double-digit earnings growth. Below, we have presented a bunch of stocks that will thrive in the rising rates environment.
Commerce Bancshares Inc. (CBSH - Free Report)
This Missouri-based regional bank holding company offers a full range of financial products to consumers and commercial customers including personal banking, lending, mortgage banking, wealth management, brokerage and capital markets services. The stock saw solid earnings estimate revision of three cents for this year over the past seven days and is expected to generate earnings growth of 29.96%. CBSH has a Zacks Rank #1 and a Growth Score of B. It belongs to the top-ranked Zacks industry (top 27%). You can seethe complete list of today’s Zacks #1 Rank stocks here.
Guess' Inc. (GES - Free Report)
This California-based iconic global lifestyle brand designs, markets, distributes, and licenses lifestyle collections of apparel and accessories for men, women and children. It has seen positive earnings estimate revision of three cents for the fiscal (ending Jan 2019) over the past 30 days and has an expected growth rate of 41.43%. Guess' has a Zacks Rank #1 and a Growth Score of A. It further falls into a top-ranked Zacks industry (top 43%).
Dillard's Inc. (DDS - Free Report)
This Arkansas-based company operates as a fashion apparel, cosmetics and home furnishing retailer in the United States. It has seen solid earnings estimate revision of $1.56 for the fiscal (ending January 2019) over the past 60 days. DDS is expected to register earnings growth of 21.25%, and has a Zacks Rank #1 and a Growth Score of A. It further belongs to a top-ranked Zacks Industry (top 1%).
Planet Fitness Inc. (PLNT - Free Report)
This New Hampshire-based franchises and operates fitness centers through its subsidiaries under the Planet Fitness name. It saw positive earnings estimate revision of 13 cents for this year over the past 30 days and is expected to witness earnings growth of 41.7%. The stock has a Zacks Rank #2 and a Growth Score of A. It belongs to the top-ranked Zacks industry (top 32%).
Lam Research Corp. (LRCX - Free Report)
This California-based company designs, manufactures, markets and services semiconductor processing equipment used in the fabrication of integrated circuits. It is expected to see earnings growth of 75.75% for this fiscal year (ending June 2018) and saw solid earnings estimate revision of 78 cents over the past seven days. Lam Research has a Zacks Rank #1 and a Growth Style Score of A. It belongs to the top-ranked Zacks industry (top 14%).
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