The tone of economic data released over the last few months has led to concerns about the state of the U.S. economy. This has led to speculation that a rate hike from the Fed is unlikely until late this year.
A certain section of market watchers have gone to the extent of saying that such a move won't happen until next year. However, recent statements from the Fed chair and other prominent officials indicate that a rate hike may be closer than some expect.
Fed Cleveland President Bullish on Hike
In an interview on Monday, Fed Cleveland President Loretta Mester said if data was in line with her forecasts, a rate hike may not be far off. Mester said the FOMC will keep all its options open on such a decision ahead of its June meeting.
She added that the Fed will by that time be able to evaluate another report on the jobs market and other crucial data. Buoyancy in the labor market and acceleration in inflation mean that the benchmark rate is likely to be raised this year, followed by further monetary tightening, Mester added.
Inflation has been an area of concern for quite some time. However, last Friday’s data on the prices front would have changed that perception. Core CPI increased to 0.3% in April. This is the largest increase since Jan 2013.
Yellen Remains Optimistic
Meanwhile, the Fed Chair also remains optimistic about the prospect of a rate hike this year. Speaking to the Chamber of Commerce in Providence, Rhode Island last Friday, Janet Yellen said she still expects the Fed to raise the benchmark rate this year.
Yellen said dismal growth during the early part of the year was likely an outcome of harsh winter weather which may only have a temporary impact. Additionally, government data may have overemphasized the effect of such conditions on the economy. This is why the Fed Chair believed a rate hike is still in the offing this year if the economy remains on course.
Financials to Gain
Stocks from the financial sector will be among those which will gain if a rate hike occurs. One particular beneficiary of higher rates is the insurance industry. This is because they take in premiums from customers, invest them — usually in fixed income securities — and then pay out claims in the future.
Also, brokerages earn interest income on un-invested cash in customer accounts. So when rates rise, they can invest this cash at higher rates. Banks may benefit from rising interest rates, as long as long-term rates move up more than short-term rates.
Our Choices
Finding a great growth stock can be a tough task. But thanks to our new style score system we have been able to identify a few growth stocks which have incredible potential in the near term.
Our research shows that stocks with Growth Style Scores of ‘A’ or ‘B’ when combined Zacks Rank #1 (Strong Buy) or Zacks Rank #2 (Buy) offer the best investment opportunities in the growth investing space.
Heritage Insurance Holdings, Inc. HRTG is a property and casualty insurance holding company. The company provides personal residential insurance for single-family homeowners and condominium owners.
Heritage Insurance holds a Zacks Rank #2 (Buy) and has a Growth Style Score of ‘A.’ The company has expected earnings growth of 4.9% for the current year. The forward price-to-earnings ratio (P/E) for the current financial year (F1) is 7.02.
JMP Group LLC JMP is a full-service investment banking and asset management firm. It provides investment banking, sales and trading, and equity research services to corporate and institutional clients.
Apart from a Zacks Rank #2 (Buy), JMP Group has a Growth Style Score of ‘B.’ The company has expected earnings growth of 9.1% for the current year and a P/E (F1) of 8.18x.
Northern Trust Corp. NTRS is the holding company for its main subsidiary, Northern Trust Company, as well as a number of other banking and non-banking financial service subsidiaries. The company derives majority of its revenues and earnings from the trust business and provides a number of related banking and financial services.
Northern Trust holds a Zacks Rank #2 (Buy) and has a Growth Style Score of ‘B.’ The company has expected earnings growth of 14.7% for the current year and a P/E (F1) of 19.74x.
Given the nature of recent comments from Fed officials, a rate hike could happen sooner than expected. Companies from the financial sector are likely to benefit from such a move. This is why these stocks would make prudent additions to your portfolio.
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