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Probability of Rate Hike Is Rising: What It Means for Investors

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Part 4
Probability of Rate Hike Is Rising: What It Means for Investors PART 4 OF 4

Financial Sector Could Be Biggest Gainer if Rates Rise

Fed’s decision

Investors around the world are waiting for the Fed’s decision on March 15, 2017. The market is showing a mixed picture ahead of the Fed’s decision. Leading US bank J.P. Morgan (JPM) wrote in a note clients that the market rally may pause due to a more hawkish tone from the Fed. It said, “In the near term we see increasing risk of a sell-off due to more hawkish Fed rhetoric at a time when investor positioning is stretched and equity volatility is likely to rise from low levels.”

Financial Sector Could Be Biggest Gainer if Rates Rise

Financial Sector Could Be Biggest Gainer if Rates Rise

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Financial sector

The Fed’s more hawkish tone is one of the major reasons behind the rising expectations for the financial sector. A gradual increase in interest rates could benefit the financial sector, as it could increase companies’ profit margins. The Fed already indicated that we could see three rate hikes in 2017, which is increasing investors’ expectations about the financial sector (VFH).

Prominent investment bank Goldman Sachs (GS) recently wrote in a note to clients, “two hikes this year would boost bank profits by at least 3 percent, financials is the sector with the greatest upward EPS revision potential and banks will benefit most.”

Goldman Sachs also advised investors to look at four financial stocks: Bank of America (BAC), Citigroup (C), JPMorgan Chase (JPM), and Visa (V), as it believes that these stocks could provide good returns in the upcoming year. The Financial Select Sector SPDR ETF (XLF), which tracks the performance of the financial sector, rose nearly 23.4% between November 8, 2016, and March 13, 2017. The S&P 500 Index rose nearly 10.5% during this period.

You may be interested to read, Analyzing Warren Buffett’s Top Holdings and Investment Strategy for more analysis.

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