With Higher Interest Rates Coming, This Is Where You Need to Be

By Thursday, June 27, 2013

With Higher Interest Rates Coming, This Is Where You Need to BeWe all know that interest rates are eventually heading higher. It might be in 2014, but more likely not until 2015, when the unemployment rate can decline to 6.5% as the Federal Reserve believes.

But one thing for sure is that interest rates are headed higher. (Read “Small-Cap Stocks the Place to Be—If Economic Growth Is Real.”)

The best way for an investor to take advantage of the situation is to concentrate on big bank stocks.

According to FactSet, the financials will lead the pack in the upcoming second-quarter earnings season, with earnings expected to rise a healthy 17.7%. (Source: “Earnings Insight,” FactSet Research Systems Inc. web site, June 21, 2013.)

The reason why the bank stocks will fare well when rates rise is that they will be able to generate higher revenues from loans as the interest rate-spread widens. That’s how bank stocks make money.

And once the bank stocks return to their original routine of paying out good dividends, they will attract more retail and institutional investors.

And don’t be afraid; bank stocks are much stronger now following the cleaning up and restructuring of the banking sector after the sub-prime credit crisis. Bank stocks can once again be added as long-term holdings.

Recall the bank stress tests by the Federal Reserve earlier this year. As a result of the stricter requirements, bank stocks are more defensive to risk and much improved as far as their balance sheets, liability, and vulnerability to dire market conditions.

The stress test assumed the worst-case scenario for banks and in all, 14 of the 18 banks managed to pass with conditional approval, with The Goldman Sachs Group, Inc. (NYSE/GS) and JPMorgan Chase & Co. (NYSE/JPM) expected to also be approved by September.

Now we’ll see if some of the banks will be allowed to raise their dividends back above two percent. If this happens, we could see a corresponding rise in the demand for bank stocks.

The reality is that the bank stocks have so far provided excellent leadership this year.

The other area that you should watch in spite of higher interest rates is the industrials sector.

Take a look at some of the companies in the Dow Jones Industrial Average, such as The Boeing Company (NYSE/BA) and General Electric Company (NYSE/GE).


About the Author | Browse George Leong's Articles

George Leong is a senior editor at Lombardi Financial. He has been involved in analyzing the stock markets for two decades, employing both fundamental and technical analysis. His overall market timing and trading knowledge are extensive in the areas of small-cap research and option trading. George is the editor of several of Lombardi Financial’s popular financial newsletters, including Red-Hot Small-Caps, Lombardi’s Special Situations, Judgment Day Profit Letter, Pennies to Millions, and 100% Letter. He is also the editor-in-chief of a... Read Full Bio »

Sep. 2, 2015
Trailing 12-month EPS for Dow Jones companies (Most Recent Quarter) $1014.15
Trailing 12-month Price/earnings multiple (Most Recent Quarter)

17.44

Dow Jones Industrial Average Dividend Yield 2.71%
10-year U.S. Treasury Yield 2.14%

Immediate term outlook:
The bear market rally in stocks that started in March 2009, extended because of unprecedented central bank money printing, is coming to an end. Gold bullion is up $1,000 an ounce since we first recommended it in 2002 and we are still bullish on the physical metal.

Short-to-medium term outlook:
World economies are entering their slowest growth period since 2009. The Chinese economy grew last year at its slowest pace in 24 years. Japan is in recession. The eurozone is in depression. With almost half the S&P 500 companies deriving revenue outside the U.S., slower world economic growth will negatively impact revenue and earnings growth of American companies. Domestically, America’s gross domestic product grew by only a meager 2.3% in the second quarter, which will negatively impact an already overpriced equity market.

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From: Michael Lombardi, MBA
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