May’s jobs report made a pretty picture of an economy with opportunities for almost everyone. The United States added 223,000 jobs last month, exceeding analysts’ estimates. Such a feat was achieved despite questions about employers’ ability to find skilled labor.
The jobless rate ticked down to an 18-year low of 3.5%, indicating that the nine-year stretch of economic expansion has scope to continue. Black unemployment, in fact, fell to a record low.
The phenomenal jobs report also shows that hourly pay went up by 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.
Jobs Report Points to Higher Interest Rates
Higher pay means that the cost of borrowing for both consumers and businesses is going to go up soon. Higher inflation, in turn, may lead 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.” Traders in the federal funds futures market are pricing in a 91.3% chance of a June rate hike.
As the stage for a rate hike is set, institutions such as banks and insurance houses will see a ramp up in profits. 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.
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.
Brokerage firms and asset managers benefit immensely from rising-rate environments since an increase in rates generally concur with periods of economic strength and investor enthusiasm (read more: Which Investments Could Benefit From Rising Interest Rates?).
Buy These Top 4 Financial Mutual Funds
Given the aforesaid positives, it will be prudent to invest in mutual funds with a major holding in such companies. These funds also possess a Zacks Mutual Fund Rank #1 (Strong Buy) or 2 (Buy), have positive 1-year and 5-year annualized returns, minimum initial investments within $5000 and carry low expense ratios (read more: Mutual Fund Pitfalls, Mind the Expense Ratio).
But, why choose mutual funds over stocks? This is because funds reduce transaction costs for investors. Funds also diversify their portfolio without the numerous commission charges that stocks need to bear (read: The Advantages Of Mutual Funds).
Fidelity Advisor Financial Services A (FAFDX - Free Report) invests the majority of its assets in securities of companies principally engaged in providing financial services to consumers and industry. FAFDX’s 1-year and 5-year annualized returns are 18.7% and 12.2%, respectively. FAFDX carries a Zacks Mutual Fund Rank #2. Annual expense ratio of 1.12% is lower than the category average of 1.47%.
Fidelity Select Brokerage & Investment Management (FSLBX - Free Report) invests a large portion of its assets in securities of companies principally engaged in the exchange of financial instruments, stock brokerage, commodity brokerage, investment banking, tax-advantaged investment or investment sales, investment management, or related investment advisory and financial decision support services. FSLBX’s 1-year and 5-year annualized returns are 25.6% and 11%, respectively. FSLBX carries a Zacks Mutual Fund Rank #1. Annual expense ratio of 0.78% is lower than the category average of 1.47%.
Prudential Jennison Financial Services A (PFSAX - Free Report) invests the major portion of its investable assets in equity and equity-related securities of financial services related companies. PFSAX’s 1-year and 5-year annualized returns are 17.2% and 4.5%, respectively. PFSAX carries a Zacks Mutual Fund Rank #2. Annual expense ratio of 1.37% is lower than the category average of 1.39%.
T. Rowe Price Financial Services (PRISX - Free Report) invests most of its net assets in the common stocks of companies in the financial services industry. PRISX’s 1-year and 5-year annualized returns are 17.9% and 13.7%, respectively. PRISX carries a Zacks Mutual Fund Rank #2. Annual expense ratio of 0.85% is lower than the category average of 1.47%.
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