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Fed Signals December Hike: Top 5 Winners

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The Fed, with a 9-0 decision, left benchmark federal funds rate unchanged this month but sees near-perfect economic environment to keep gradually increasing rates. Fed officials have, thus, kept the door open to a fourth hike this year, in December.

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 Remains Slightly Hawkish

The policymaking Federal Open Market Committee meeting, as widely expected, unanimously held federal funds rates steady at the range of 2% to 2.25%. Rates, thus, remained at its highest levels since October 2008, just after the collapse of Lehman Brothers (read more: 5 Bank Stocks That Made the Most Since Lehman's Collapse).

The Fed, however, did send a slightly hawkish message. They offered a mostly upbeat assessment of the U.S. economy, indicating another rate hike by the end of the year. Traders in the fed funds futures market are now implying about a 93% probability for a hike at the year’s final meeting.The Fed, by the way, had earlier already forecasted three rate hikes next year.

U.S. Economy in Good Shape

The Fed did mention that “economic activity has been rising at a strong rate and that labor market has continued to strengthen,” which could easily offset concerns about soft spots in the economy. In the last two quarters, the U.S. economy recorded the fastest six-month growth in four years and is on track to hit the Trump administration’s annual growth target of 3%. If that happens, it would be the best yearly performance since 2005, two years before the Great Recession.

The U.S. economy got a boost in the third quarter, with GDP increasing at an annualized pace of 3.5%, per the U.S. Commerce Department. In fact, the country’s total output of goods and services followed an even stronger 4.2% growth in the second quarter.

The U.S. economy also continued to be one of the world’s most powerful employment generating machines. According to the Bureau of Labor Statistics, the economy added 250,000 new jobs in October, exceeding analysts’ estimates of around 188,000. Nonfarm payrolls, in fact, rose average 213,000 through the first 10 months of this year, way higher than 182,000 in the same period last year.

Such a feat was achieved despite questions about employers’ ability to find skilled labor, headwinds associated with slowdown in cyclical part of the economy, including housing, and distortions from hurricanes.

By the way, the jobless rate ticked down to 3.7%, the lowest since 1969. The real unemployment rate, including those who are underemployed and discouraged, also known as the U6 rate, contracted to 7.4%, which is slightly less than last’s month’s estimate of 7.5%. The U6 now stands at a level lower than it was during the 2007-2009 recession (read more: 5 Top Stocks to Make the Most of Blockbuster Jobs Report).

The Fed, in the meantime, acknowledged slowdown in business investment but echoed its previous assessment of consumption, which accounts for 70% of the economy by saying that household spending “has continued to grow strongly”.

Financials to Win Big

With the Fed hinting at further hikes in the near term, financials stands to gain. Banks are definitely the go-to rate trade. Higher interest rates will boost bank profits as they increase the spread between what banks earn by funding longer-term assets, such as loans, with shorter-term liabilities.

Insurers, by the way, 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 rise in interest rates. This enables life insurers to invest their premiums at higher yields and earn more investment income, expanding their profit margins.

An increase in rates generally concurs during periods of economic strength and upbeat investor sentiments, which also bodes well for brokerage firms and asset managers.

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).

Commerce Bancshares, Inc. (CBSH - Free Report) operates as the holding company for Commerce Bank that provides retail, mortgage banking, corporate, investment, trust, and asset management products and services to individuals and businesses. The company currently has a Zacks Rank #2. The Zacks Consensus Estimate for the company’s earnings rose 1.8% in the last 60 days.  The company’s expected earnings growth rate for the current year is 42.6% compared with the Banks - Midwest industry’s projected rise of 28.6%.

1st Constitution Bancorp (FCCY - Free Report) operates as the bank holding company for 1st Constitution Bank that provides commercial and retail banking services in the central and northeastern New Jersey areas. The company currently has a Zacks Rank #1. The Zacks Consensus Estimate for the company’s earnings rose 8.9% in the last 60 days.  The company’s expected earnings growth rate for the current year is 50% compared with the Banks - Northeast industry’s estimated rise of 22.6%.

Great Southern Bancorp, Inc. (GSBC - Free Report) operates as a bank holding company for Great Southern Bank that offers a range of financial services in the United States. The company currently has a Zacks Rank #2. The Zacks Consensus Estimate for the company’s earnings rose 13.9% in the last 60 days.  The company’s expected earnings growth rate for the current year is 24.5% compared with the Financial - Savings and Loan industry’s estimated growth of 23.6%. You can see the complete list of today’s Zacks #1 Rank stocks here.

Berkshire Hathaway Inc. (BRK.B - Free Report) , through its subsidiaries, engages in insurance business. The company currently has a Zacks Rank #1. The Zacks Consensus Estimate for the company’s earnings rose 4.3% in the last 60 days.  The company’s expected earnings growth rate for the current year is 70.1% compared with the Insurance - Property and Casualty industry’s projected rise of 20.3%.

Ameriprise Financial, Inc. (AMP - Free Report) provides various financial products and services to individual and institutional clients. The company currently has a Zacks Rank #2. The Zacks Consensus Estimate for the company’s earnings rose 2.5% in the last 60 days.  The company’s expected earnings growth rate for the current year is 22.6% compared with the Financial - Investment Management industry’s expected rise of 4.6%.

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