They say “Change Is the Law of Nature,” as it helps a society or an individual to evolve and better adapt to the changing conditions. However, the Federal Reserve apparently could not afford a change to its rates given the economic conditions. The central bank was compelled to keep short-term interest rates at near-zero levels for over 67 months, and it continues to be so.
Fed’s benchmark near-zero rate policy coupled with the monetary stimulus was intended to revive the economy from the aftermath of the recession in the late 2000s. Nonetheless, the economy has reportedly been able to grow only at an average rate of 2.2% in the five years post recession. This is less than the 3.6% average quarterly growth rate from the end of World War II through 2007. Let us further look into some other pointers that clearly suggest that the expiry of the zero-rate policy is round the corner.
Grim Economic Pointers
With near-zero interest rates, interest income – which has been a vital component in the personal income basket, has waned since 2007 and has virtually dried its coffers for a regular income stream. This led senior citizens to prolong retirements and made career advancements difficult for the younger generation. Subsequently, wages have stagnated.
According to data compiled by Bloomberg, the real value of compensation per hour rose by only 0.5% since 2009 – the weakest growth since World War II. As wages remain static, discretionary expenses reduce and adversely affect other sectors like retail and housing. Retail and housing are vital pillars to the overall well being of the economy.
At the other end of the spectrum, despite adding 209,000 jobs in July, the unemployment rate increased to 6.2% from 6.1% in June. Although unemployment rate is lurking near record low since Sep 2008, employers are increasingly finding it hard to scout talents to fill vacant slots. This might ultimately lead to wage inflation, making it a prerogative for Fed to ease out the life support for the labor market.
Fed’s monetary easing policy has probably outlived its lifespan and lost its utility with an uninterrupted zero-interest policy for 67 months. It therefore should be prudent to annul this policy sooner than later so that Fed is left with enough dry powder to counter a fresh downturn if at all it comes.
Sectors to Benefit with Interest Rise
Rising interest rates are a boon for some sectors and bane for some. Sectors that benefit from higher interest rates are primarily those whose revenues depend on interest income. These include banks, e-brokers and insurance sectors, which comprise diverse firms that make money by investing cash in high-interest generating vehicles.
Banks typically earn higher interest rate spread as interest rates rise. At the same time, banks are likely to generate a higher ROI by investing money at other high-margin businesses. On the other hand, e-brokers stand to gain by collecting more trading fees as more people buy stocks with improved investor confidence stemming from higher interest rates.
In addition, e-brokers also stand a chance to gain higher interest income by investing a significant chunk of depositors’ money in high-interest rate financial instruments. Insurance companies benefit from rising interest rates by earning more money from investments as well as charging higher premiums due to rising inflation that generally accompany higher interest rates.
3 Top-Ranked Stocks from the Favored Sectors
Banc of California, Inc. (BANC): Headquartered in Irvine, CA, Banc of California offers a plethora of retail banking products and services in the U.S. This Zacks Rank #1 (Strong Buy) stock has over $4 billion in consolidated assets and more than 80 banking locations.
Banc of California has long-term earnings growth expectation of 12.5%. Furthermore, earnings estimate revisions for the current quarter and year have been moving up. In addition, Banc of California belongs to the Banking Industry that carries a Zacks Industry Rank #27. As a guideline, the outlook for industries with Zacks Industry Rank #88 and lower is 'Positive,' between #89 and #176 is 'Neutral' and #177 and higher is 'Negative.'
Marcus & Millichap, Inc. (MMI): This Zacks Rank #1 stock operates as a brokerage firm, offering investment brokerage and financing services to clients of various types and sizes of commercial real estate assets in the U.S. and Canada. Earnings estimate revision for both the current quarter and year has moved up in the last 30 days.
With long-term earnings growth expectations of 25.0%, Marcus & Millichap is a solid pick. In addition, Marcus & Millichap belongs to the Real-Estate-Development Industry that carries a Zacks Industry Rank #77.
National General Holdings Corp. (NGHC): Based in New York, National General Holdings operates as a specialty personal lines insurance holding company, providing personal and commercial automobile insurance, supplemental health insurance products and other niche insurance products in the U.S. Earnings estimate revision for this Zacks Rank #1 stock for the ongoing quarter and full year 2014 have moved up in the last month, implying bullish sentiment for the long-term growth of the company.
With long-term earnings growth expectations of 15.0%, National General Holdings is likely to outperform the broader equity market. In addition, the company belongs to the Property and Casualty Insurance Industry that carries a Zacks Industry Rank #80.
Moving Forward
Amid positive indications that the Fed is likely to raise the short-term interest rates sometime next year, a sneak peek to the space for some possible outperformers backed by a solid Zacks Rank and a favorable Zacks Industry Rank could be a great idea for investors to gain from this season.
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