U.S. markets extended their winning run into the fourth straight session on Wednesday. The primary catalyst for gains was bank stocks. This class of equities surged following a rise in U.S. bond yields. Yields closely mirrored the spike in their European counterparts, following indications that the ECB was preparing to wind down its stimulus program.
The jump in U.S. bond yields was not unexpected. A spurt in GDP over the next few quarters is likely to raise inflation and consequently interest rates. A spike in rates increases the yield spread for banks, which in turn boosts their margins. Adding banking stocks to your portfolios looks like a smart option at this point.
Bank Stocks Push Benchmarks Higher
The Dow surged 300 points to close above 25,000 for the first time since mid-March. Though The Boeing Company’s BA 3.2% increase was the primary reason for the blue-chip index’s gains, bank stocks also contributed their part. Shares of JPMorgan Chase & Co. JPM and The Goldman Sachs Group, Inc. GS increased by 2.3% and 1.7%, respectively.
The S&P 500 also gained 0.9% with the Financial Select Sector SPDR (XLF) emerging as the highest gaining sector, increasing 1.9%. Shares of Bank of America Corporation BAC and Morgan Stanley MS increased 3.2% and 2.2%, respectively. Further, the SPDR S&P Bank ETF (KBE) increased 2.1%, enjoying its best day of gains since Mar 26.
European Yields Surge as ECB Hints at End of Stimulus
On Wednesday, European bond yields spiked following comments from key ECB officials which indicated the central bank was preparing to wind down its asset purchase in the near term. ECB’s chief economist and board member Peter Praet said the bank will deliberate next week as to how to unravel its monthly bond purchases.
Praet mentioned that the “underlying strength” of the Eurozone’s economy was providing him with the confidence to predict that inflation would soon near its targeted level. His hawkish colleague at the ECB and president of Bundesbank, Jens Weidmann, said market expectations that bond purchases would cease before the end of the year were “plausible.”
Higher Growth to Boost Inflation, Bond Yields
Consequently, U.S. bond yields followed their European counterparts higher. The 10-year U.S. Treasury yield hit 2.98%, marking its highest level since May 24. The increases were not unexpected, given that recent economic data has been more than encouraging. This in turn is likely to boost inflation and consequently, bond yields.
Several analysts believe that a 3% pace of growth is already priced into yields. If growth nears 4%, yields are likely to pick up further. This in turn could lead to the Fed raising rates for the fourth time this year. Such an occurrence would not be unwelcome if it takes place against a backdrop of strong growth.
Our Choices
Bank stocks have mopped up strong gains whenever yields have moved higher. A spike in European yields was the catalyst on the latest occasion. But domestic factors are also at play and a pickup in growth could spur inflation, boosting yields higher.
Adding banking stocks to your portfolio looks like a profitable option at this time. This is because these are likely to benefit from the widening of the yield spread. However, picking winning stocks may be difficult.
This is where our VGM Score comes in. Here V stands for Value, G for Growth and M for Momentum and the score is a weighted combination of these three scores. Such a score allows you to eliminate the negative aspects of stocks and select winners. However, it is important to keep in mind that each Style Score will carry a different weight while arriving at a VGM Score.
We have narrowed down our search to the following stocks based on a good Zacks Rank and VGM Score.
Old Second Bancorp, Inc. OSBC is the holding company for Old Second National Bank that offers a variety of banking services.
Old Second Bancorp has a Zacks Rank #1 (Strong Buy) and a VGM Score of A. The company has expected earnings growth of 36.4% for the current year. The Zacks Consensus Estimate for the current year has improved by 5.7% over the last 60 days.
Metropolitan Bank Holding Corp. MCB is the holding company for Metropolitan Commercial Bank, which offers a range of banking products and services to individuals and businesses.
Metropolitan Bank Holding has a VGM Score of B. The company has expected earnings growth of 8.7% for the current year. The Zacks Consensus Estimate for the current year has improved by 4.4% over the last 30 days. The stock has a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.
Nicolet Bankshares, Inc. NCBS is a bank holding company for Nicolet National Bank that offers a range of banking services to businesses and individuals.
Nicolet Bankshares has a Zacks Rank #2 (Buy) and a VGM Score of A. The company has expected earnings growth of 7.3% for the current year. The Zacks Consensus Estimate for the current year has improved by 8.3% over the last 60 days.
Citizens Financial Group, Inc. CFG is one of the largest retail bank holding companies in the United States. Citizens Financial offers an array of retail and commercial banking products and services to individuals, institutions and companies.
Citizens Financial has a Zacks Rank #2 and a VGM Score of B. The company has expected earnings growth of 33.7% for the current year. The Zacks Consensus Estimate for the current year has improved by 0.2% over the last 30 days.
Southern National Bancorp of Virginia, Inc. SONA is the holding company for Sonabank that offers a variety of banking services.
Southern National Bancorp of Virginia has a Zacks Rank #2 and a VGM Score of B. The company has expected earnings growth of 42.1% for the current year. The Zacks Consensus Estimate for the current year has improved by 8.7% over the last 60 days.
Will You Make a Fortune on the Shift to Electric Cars?
Here's another stock idea to consider. Much like petroleum 150 years ago, lithium power may soon shake the world, creating millionaires and reshaping geo-politics. Soon electric vehicles (EVs) may be cheaper than gas guzzlers. Some are already reaching 265 miles on a single charge.
With battery prices plummeting and charging stations set to multiply, one company stands out as the #1 stock to buy according to Zacks research.
It's not the one you think.
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
Be the first to comment