Powell Presents Optimistic View on Capitol Hill: Top 5 Winners

Fed Chair Jerome Powell presented an optimistic picture of the U.S. economy during his congressional testimony. He said that consumers and businesses have helped the economy gain traction. Such an upbeat view made investors believe that inflation will pick up and compel the Fed to tighten its monetary policy.

Powell has, himself, indicated that the Fed is committed toward gradually raising short-term interest rates. This calls for investing in banks, insurance and brokerage houses as such institutions will see a hike in profits on steady interest rate hikes and healthy economic conditions.

Powell’s Bright Economic Outlook

Powell, in his first appearance at Capitol Hill, presented an encouraging picture of the U.S economy. He expressed confidence that the coming few years will be “good years for the economy.” After all, Americans are willing to spend more and business houses have perked up investments, helping boost productivity. 

Consumers have been ramping up their spending levels of late as they are, largely, benefitting from a low unemployment level and a rise in income. Jobless rate remained at an ultra-low level of 4.1%, while wage growth hit the fastest pace in January in more than eight-and-a-half years. Average hourly wages increased 9 cents, or 0.3%, to $26.74. This helped the average year-on-year hourly earnings to rise to 2.9%, the highest since June 2009. To top it, minimum wage has been raised in 18 states in January, which had a positive impact on 4.5 million workers, per the Economic Policy.

Consumer confidence, in the meantime, hit the highest level in February since November 2000, per the Conference Board. The index rose to 130.8 this month from 124.3 in January. The index, thus, went past the 130 mark for the first time since Bill Clinton was President. Households haven’t felt this confident about the current state of the economy. Such optimism will further help household spending increase by leaps and bounds.

Stronger Outlook Raises Chances of More Rate Hikes

Traders predict that an upbeat economy will fuel inflation and prompt the Fed to step in and hike rates at a faster pace. Many of them are already predicting that the Fed will increase rates four times instead of three. According to data from the CME Group, odds of four rate hikes by year-end rose to 33% from about 20% on Feb 26.

Powell, in the meantime, maintained that the Fed would keep to its plan of hiking rates three times this year. But, he did mention that “we’ve seen some data that will in my case add some confidence to my view that inflation is moving up to target.”

Minutes of the Jan 30-31 Federal Open Market Committee meeting show that several officials expect inflation to move up this year and touch the Fed’s 2% target. Only a minority of them forecast inflation will fall short of the 2% target.

The Fed’s staff also expect inflation to climb higher. They believe that the core personal consumption expenditure (PCE) index “would rise notably faster this year” from its current 1.5% rate.

Who Stands to Gain From a Rate Hike?

Higher interest rates can boost bank profits as they increase the spread between what banks earn by funding longer-term assets, such as loans, with shorter-term liabilities. The spread between long-term and short-term rates also expands during interest rate hikes because long-term rates tend to rise faster than short-term rates.

Rising rates act as a boon for insurance companies also as they derive their investment income from investing premiums, which are received from policyholders in corporate and government bonds. Yields and coupons on these bonds rise in response to a hike in Fed fund rates and bank interest rates. This enables life insurers to invest premiums at higher yields and earn more, expanding profit margins. Not only investment income, which is an important component of insurers’ top line, annuity sales should gain from a raised rate.

Brokerage firms and asset managers also benefit immensely from a rising rate environment since an increase in rates generally concurs during periods of economic strength and upbeat investor sentiments.

5 Top Gainers

Given the aforesaid factors, we have selected five solid stocks from these areas that boast a Zacks Rank #1 (Strong Buy) or 2 (Buy). The search was also narrowed down with a VGM Score of A or B. Here V stands for Value, G for Growth and M for Momentum and the score is a weighted combination of these three metrics. Such a score allows you to eliminate the negative aspects of stocks and select winners.