The relentless rise in oil prices at the moment renewed worries over inflation. Also, the expansion of the U.S. economy’s service sector for the eighth month in August raised concerns about a persistent increase in the prices of indispensable commodities.

Now, as fears about inflation revive, interest rates are expected to stay higher for a longer period. This, in turn, may not bode well for the broader stock market but it’s certainly beneficial for financial companies such as Brighthouse Financial BHF, Reinsurance Group of America RGA, Mercantile Bank MBWM, Northeast Community Bancorp NECB, and The Bancorp TBBK, making them a solid investment choice at present.

Inflation Worries Reignite

Oil prices across the globe have been increasing in recent times after major oil producers, including Saudi Arabia and Russia, agreed to extend supply cuts until the end of December 2023.

Improvement in China’s manufacturing activity also boosted oil prices. After all, China’s economic development will provide them with the means to import oil and perk up demand.

The West Texas Intermediate crude increased 1% to finish at $87.54 a barrel on Sep 6 and gained for the ninth successive trading session, its longest daily winning streak since January 2019. Similarly, Brent crude rose 0.6% to settle at $90.60 a barrel in yesterday’s trading session.

However, a rise in oil prices is now expected to spark a fresh wave of inflation. Higher oil prices will result in an increase in transportation costs, which will impact the prices of essential products sequentially. Crude oil, in particular, is needed for petrochemicals that are used to make plastics. Thus, expensive oil increases the price of plastics as well.

What’s more, expansion in service sector activity indicated that the U.S. economy is chugging along, and Americans have the wherewithal to spend, which could lead to a further rise in price pressure. The services PMI increased to 54.5% in August from July’s reading of 52.7%, the highest reading since February.

Federal Reserve Not Done With Rate Hikes Yet

With inflation concerns increasing, the Fed is expected to continue its aggressive monetary policies. Fed Chair Jerome Powell acknowledged recently that inflation is not at an acceptable level yet. Thus, more interest rate hikes are likely by the central bank soon.

The probability of a 25-basis-point rate hike has already gone up from a meager 7% in September to 40.8% in November, per CME FedWatch Tool.

The Big Winners

Insurance companies tend to gain amid an increasing interest rate environment. These companies invest the premiums they receive from policyholders at a higher yield when interest rates increase and earn more.

Banks also stand to gain in a hawkish environment. The spread between a bank’s short-term liabilities and earnings from loans increases, thereby boosting its profit margins.

5 Solid Choices

With insurance companies and banks poised to win big, we have selected five sound stocks that boast a Zacks Rank #1 (Strong Buy) or 2 (Buy).

Brighthouse Financial is one of the largest providers of annuity and life insurance products in the United States.

The Zacks Consensus Estimate for its current-year earnings has moved up 5.6% over the past 60 days. The company’s expected earnings growth rate for the current year is 38.8%. BHF, presently, has a Zacks Rank #2.

Reinsurance Group of America is a leading global provider of traditional life and health reinsurance.

The Zacks Consensus Estimate for its current-year earnings has moved up 2.5% over the past 60 days. The company’s expected earnings growth rate for the current year is 25.6%. RGA currently has a Zacks Rank #2.

Mercantile Bank provides a full range of mortgage, lending, deposit, and checking products and services.

The Zacks Consensus Estimate for its current-year earnings has moved up 11.2% over the past 60 days. The company’s expected earnings growth rate for the current year is 26.5%. MBWM, presently, has a Zacks Rank #2.

Northeast Community Bancorp provides financial services for individuals and businesses.

The Zacks Consensus Estimate for its current-year earnings has moved up 10% over the past 60 days. The company’s expected earnings growth rate for the current year is 81%. NECB currently has a Zacks Rank #1.

The Bancorp is a Delaware-chartered, federally-insured commercial bank.

The Zacks Consensus Estimate for its current-year earnings has moved up 1.7% over the past 60 days. The company’s expected earnings growth rate for the current year is 61.2%. TBBK, presently, has a Zacks Rank #2.
Reinsurance Group of America, Incorporated (RGA): Free Stock Analysis Report

The Bancorp, Inc. (TBBK): Free Stock Analysis Report

Mercantile Bank Corporation (MBWM): Free Stock Analysis Report

Brighthouse Financial, Inc. (BHF): Free Stock Analysis Report

Northeast Community Bancorp Inc. (NECB): Free Stock Analysis Report

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