Persistent inflationary woes have obligated the majority of the Fed officials to remain hawkish in the July meeting as they hint at higher interest rates soon. This, in turn, is a boon for financial companies such as Radian Group (
RDN - Free Report) , JPMorgan Chase & Co. (JPM - Free Report) and Mercantile Bank (MBWM - Free Report) , which makes them compelling investment choices as of now.
Stocks End in the Red for the Second Straight Day
Major bourses ended in the negative territory on Aug 16 and registered back-to-back losses. After all, the broader S&P 500 Index, the tech-laden Nasdaq, and the 30-stock index, better known as the Dow, slipped more than 1% on Aug 15.
The S&P 500, in particular, ended below its 50-day moving average on Aug 15 for the first time since Mar 28, per Dow Jones Market Data. It’s a tell-tale sign that the index could extend its losses further, as it did on Aug 16, and that the summertime stock-market selloff trend hasn’t finished yet.
Fed Officials See More Rate Hikes
From an increasing long-dated Treasury yield to a stronger U.S. dollar, all are hurting the stock market rally. But recently, the Fed’s minutes from the meeting held in July showed that most of the officials believe that “upside inflation risks” persist, which could lead to further interest rate increases.
The possibility of more rate hikes rattled investors and dragged the stock-market indexes lower. This is because interest rate hikes impact borrowing costs, curtail consumer spending, and hamper economic growth.
Most Fed officials said, “further tightening of monetary policy” is needed to ease inflationary pressure. Lately, both retail and producer prices may have moderated from last year, but inflation remains above the Fed’s desired target of 2%. And with consumer outlays showing no signs of ebbing, prices of indispensable commodities are well-poised to rise (read more: 5 Stocks to Make the Most of Booming Retail Sales).
Most Fed officials also believe that moderation in real GDP growth and softening of labor market conditions are required to bring down inflationary pressure. However, at present, the economy continues to chug along, and the labor market exhibits strength.
Currently, the CME FedWatch Tool shows that most market participants anticipate the Fed to keep interest rates unchanged in the September meeting. But the likelihood of a 25-basis-point rate increase in the November meeting has gone up modestly following the release of the Fed minutes.
The Big Winners
The broader stock market may have fallen on fears of an increasing interest rate environment. But such a situation bodes well for insurance companies. They invest the premiums they get from policyholders in corporate and government bonds. When the interest rate increases, bond yields rise, helping insurance companies to invest the premiums at a higher yield, and earn more.
When interest rate increases, banks also stand to gain. The spread between what a bank earns from loans with short-term liabilities like deposits increases amid higher interest rates, thereby increasing their profit margins.
3 Solid Choices
With insurance players and banks poised to win big, we have selected three solid stocks from these areas that boast a Zacks Rank #1 (Strong Buy) or 2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Radian Group is known for providing its clients with an array of private mortgage insurance products and services. The decline in primary delinquent loans coupled with an improving risk-based capital ratio, all augur well for Radian’s long-term growth.
Radian Group’s estimated earnings growth rate for the next five-year period is 5%. Its shares have already gained 19% over the past five years. The Zacks Consensus Estimate for its current-year earnings has moved up 5.8% over the past 60 days. RDN, presently, has a Zacks Rank #2.
JPMorgan Chase is one of the biggest global banks. Its strong liquidity position and diversification initiatives will surely boost its long-term growth prospects.
JPMorgan’s estimated earnings growth rate for the next five-year period is 5%. Its shares have already gained 10.4% over the past five years. The Zacks Consensus Estimate for its current-year earnings has moved up 10.3% over the past 60 days. JPM, currently, has a Zacks Rank #1.
Mercantile Bank aids consumers across Grand Rapids and Kent County with a variety of mortgage, lending, deposit, and checking products and services.
Mercantile Bank’s estimated earnings growth rate for the current year is 26.5%. Its shares have already gained 12.5% over the past five years. The Zacks Consensus Estimate for its current-year earnings has moved up 11.4% over the past 60 days. MBWM has a Zacks Rank #2 at present.
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