5 Stocks To Buy As Rate Hike Prospects Rise

On Friday, comments from key Fed officials heightened prospects of a rate hike in the near term. The traditionally dovish Eric Rosengreen signaled that refraining from hiking rates any longer could harm the economy. Meanwhile, Daniel Tarullo sought further indications of rising inflation but added that he was open to a rate hike this year.

Meanwhile, Fed Governor Lael Brainard is due to speak on policy issues at an event on Monday. Historically known for her dovish approach, it is expected that she may adopt a different stance so as to raise market expectations about a hike. These events indicate that a near term rate hike is in the offing and it may be a good idea to pick stocks likely to benefit in such an event.

Officials Strike Hawkish Tone

Boston Fed President Eric Rosengreen said that the Fed was running the risk of harming the economy if it held off raising rates for too long. Instead, steadily raising rates may be a more appropriate approach. Rosengreen admitted that external economic weaknesses remain a concern. However, he felt the U.S. economy had shown enough resilience in the face of such worries.

Rosengreen felt the central bank runs the chance of overheating the economy if it holds off raising rates any longer. Speaking to CNBC, Federal Reserve Governor Daniel Tarullo said he was looking for further evidence of steady inflation before taking another rate hike into consideration. However, Tarullo refused to rule out a rate hike later this year altogether.

Banks, Insurers to Gain

Rosengreen’s hawkish comments led to a broad downturn in stocks on Friday. The S&P 500 lost 2.5% on Friday, suffering its worst decline in two months. However, barring an overall market decline, stocks of banks and insurers are likely to gain going forward and such signs are already evident.

The KBW Nasdaq Bank Index which comprises several large banks, such as Wells Fargo (NYSE:WFC) and Bank of America (NYSE:BAC) , increased 7% in August while the S&P 500 declined marginally. The index remains in the red year-to-date but several factors may already be working in the favor of stocks from these sectors.

A hike in rates will unequivocally benefit banks and insurers. Firstly, profits for banks rise when rates move higher, since their spread will also increase. Secondly, most bank stocks are trading at a cheaper price compared to the overall market. This is also what makes them likely to succeed moving forward. While benchmarks suffered a grievous fall last Friday, the KBW Nasdaq Bank lost only 1%.

Similarly, the SPDR S&P Insurance ETF (KIE) lost slightly more than 1%. The index gained more than 4% over the month of August. For insurance companies, investment income forms a major revenue component. A low rate puts pressure on investment income and in turn on investment yields. Hence any increase in the interest rate would lead to gains for insurers. (Read: Original post

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Written By: Zacks Investment Research