Financials Fly as More Fed Rate Hikes Loom

Monday, February 20, 2017

Mike Larson

What do you get when you throw together rising inflation … promises of deregulation … looser lending standards … the potential for bigger dividend payouts … accelerating economic growth … and a Federal Reserve that is all but certain to hike interest rates again soon? The perfect, positive storm for financial stocks in general, and bank stocks in particular.

No wonder the broad-based Financial Select Sector SPDR Fund (XLF, Rated “B”) just broke out to fresh nine-year highs. It has now recaptured most of the ground it lost in the Great Financial Crisis of 2007-2009 – though it still remains below its all-time high near $31, as you can see in this weekly chart:

Why are banks en fuego? It starts with the latest inflation figures. We just learned that wholesale prices rose at a 0.6% rate in January. That was twice the expectation of economists and the biggest monthly surge since September 2012.

At the consumer level, inflation also jumped 0.6% — the biggest rise in almost four years and double the gain in December. The core Consumer Price Index (which excludes food and energy) rose a greater-than-expected 0.3% on the month, pushing year-over-year core inflation to 2.3%. That’s well above the Fed’s target of 2%.

The hotter inflation data come amid other positive reports on everything from job growth to retail sales. With the next Fed meeting looming on March 14-15, it’s entirely possible that we’ll get our third rate hike for this cycle. Fed Chairman Janet Yellen said as much in her Congressional testimony last Tuesday and Wednesday.

Banks like higher rates, especially at the longer end of the yield curve, because they boost the profitability of making loans. So the end of several years of low-rate purgatory is incredibly bullish.

But that’s not all the banks have going for them. Donald Trump’s administration also wants to weaken the Dodd-Frank reform law enacted in the wake of the financial crisis, as well as take other steps to increase bank lending. That would boost revenue and earnings growth over time.

Furthermore, Trump’s reforms should allow banks to boost share buybacks and dividend payouts. One recent Wall Street Journal article concluded the six largest U.S. banks alone could shower investors with more than $100 billion in additional payouts and buybacks.

To top it all off, Fed Governor Daniel Tarullo said a few days ago that he would resign. Tarullo is the Fed’s top official focused on bank regulation, and he had a reputation for being fairly strict. His abdication means Trump can appoint a more bank-friendly replacement.

Bottom line: The markets recently got extended, and could see a correction at any time. But the big-picture backdrop is as positive for banks as it has been in many, many years.

So how can you profit? Well, buying ETFs like the XLF is always an option. But I recommend you check out the Top Stocks Under $10 service my colleague Mandeep Rai runs, too.

He does a great job identifying the best low-priced banks, banks that could surge in value as the industry’s prospects improve. Just click here for more details.

Until next time,

Mike

Mike Larson, Senior Analyst

Stocks & Sectors Edition , by Mike Larson, Senior Analyst

Mike Larson is a Senior Analyst for Weiss Ratings. A graduate of Boston University, Mike Larson formerly worked at Bankrate.com and Bloomberg News, and is regularly featured on CNBC, CNN, Fox Business News and Bloomberg Television as well as many national radio programs. Due to the astonishing accuracy of his forecasts and warnings, Mike Larson is often quoted by the Washington Post, Chicago Tribune, As-sociated Press, Reuters, CNNMoney and many others.

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