The Federal Reserve may have left the benchmark federal funds rate unchanged this month but has signaled another rate hike and that rates may remain elevated for a longer period than earlier expected.
This calls for investing in stocks such as Wintrust Financial WTFC, Northeast Community Bancorp NECB, Orange County Bancorp, Inc. OBT, Reinsurance Group of America RGA and Primerica PRI. These should witness a ramp-up in profits amid interest rate hikes.
Fed’s Hawkish Stance
The Fed, in its recent policy meeting, has kept interest rates unchanged, as widely expected. Now, the benchmark rate stands at a range of 5.25%-5.5%, which is still the highest in 22 years.
However, the central bank expects another quarter percentage point interest rate hike by the end of this year, implying that the benchmark rate will finish the year in a range of 5.5-5.75%. Twelve out of 19 Fed officials penciled in one more interest rate increase this year.
The Fed’s dot plot projections also showed that there will be fewer rate cuts next year. Interest rates are projected to stay higher for longer, with two rate cuts expected in 2024, two less than what was projected during the June policy meeting. Thus, the benchmark rate is expected to remain above the 5% mark next year as well.
And why not? Encouraging economic growth coupled with a resilient labor market is expected to keep inflation elevated, and the Fed hawkish when it comes to its monetary policies. Fed officials, in reality, expect the gross domestic product (GDP) to perk up 2.1% this year, which is more than double the June projection. Similarly, the GDP outlook for next year increased to 1.5% from 1.1%.
On the other hand, inflation continues to hover well above the Fed’s desired target of 2%. The core personal consumption expenditures index, the Fed’s favored inflation gauge, which strips out the volatile food and energy costs came in at 4.2% in July.
Financials to Win Big
With interest rates expected to stay higher for longer, the broader stock market primarily led by tech players took a hammering on Sep 20. After all, interest rate hikes curtail consumer outlays, increase the cost of borrowings, and hamper economic growth. But investors shouldn’t shun equities.
Instead, they should place their bets on financial stocks, including banks and insurance companies.
An increase in interest rates leads to an increase in the spread between a bank’s short-term liability, like deposits, and its long-term assets such as loans, thereby boosting the lender’s profit margins.
Insurers, by the way, earn by investing premiums they receive from policyholders in government and corporate bonds. Now, rate hikes increase the yields on these bonds. Insurers, thus, can invest their premiums at a higher yield, and earn more.
Top 5 Choices
Given the positives, we have selected five solid financial stocks that should make meaningful additions to your portfolio. The stocks boast a Zacks Rank #1 (Strong Buy) or 2 (Buy).
Wintrust Financial provides banking services, trust and investment services, and commercial insurance premium financing. WTFC currently has a Zacks Rank #2. The Zacks Consensus Estimate for its current-year earnings has increased 0.3% over the past 60 days. The company’s expected earnings growth for the current year is 24.3%.
Northeast Community Bancorp is a federally chartered stock holding company established to be the holding company for Northeast Community Bank. NECB currently has a Zacks Rank #1. The Zacks Consensus Estimate for its current-year earnings has increased 10% over the past 60 days. The company’s expected earnings growth for the current year is 81%.
Orange County Bancorp provides commercial and consumer banking services to individuals, small businesses, and local municipal governments. OBT currently has a Zacks Rank #2. The Zacks Consensus Estimate for its current-year earnings has increased 20.3% over the past 60 days. The company’s expected earnings growth for the current year is 21.7%.
Reinsurance Group of America is a leading global provider of traditional life and health reinsurance and financial solutions. RGA currently has a Zacks Rank #2. The Zacks Consensus Estimate for its current-year earnings has increased 2.6% over the past 60 days. The company’s expected earnings growth for the current year is 25.6%.
Primerica assists its clients in meeting their needs for term life insurance. PRI currently has a Zacks Rank #2. The Zacks Consensus Estimate for its current-year earnings has increased nearly 2% over the past 60 days. The company’s expected earnings growth for the current year is 36.6%.
Wintrust Financial Corporation (WTFC): Free Stock Analysis Report
Reinsurance Group of America, Incorporated (RGA): Free Stock Analysis Report
Primerica, Inc. (PRI): Free Stock Analysis Report
Northeast Community Bancorp Inc. (NECB): Free Stock Analysis Report
Orange County Bancorp, Inc. (OBT): Free Stock Analysis Report
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This article originally appeared on Zacks
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