Investing In A Higher Interest Rate Environment

Jerome H. Powell & Co. raised its Fed Funds rate target again this week, but the current benchmark lending rate of 4.5% is still below the average rate since 1971 of 4.92%. Federal Reserve, futures markets are now suggesting that the Federal Reserve’s rate will peak next year just below its long-term average.

As a result, I understand that money market fund and bond yields are much more interesting than they have been in recent years, but I haven’t lost much sleep on the interest rate spike. Students of history will understand that the only conclusion one can draw about rising interest rates is that it is a headwind for bonds.

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cherish the right place

Granted, it’s no secret that stocks of all types have struggled this year despite the data above, but value stocks have far outperformed growth stocks. In fact, at the time of this writing, the cheaper Russell 3000 Value Index outperforms the more expensive Growth Index by more than 19% in 2022.

Admittedly, we’re hardly celebrating value and growth in the red this year, but I think this magnifies the potential returns we’ll get over the next three to five years. Despite many warning that a recession may be lurking around the corner, I think the outlook remains bright for undervalued stocks.

Like most things, I think recessions are likely to be mild and short-lived. So I think people who share my long-term vision should put their money in the bank. I’m not talking about bank accounts, I’m talking about bank stocks.

well capitalized

i agree JP Morgan Chase (JPM) CEO Jamie Dimon said last week when asked about the expected recession, “I don’t know if it will be a mild recession or a deep recession. It’s okay if it happens,” he said.

Supporting that claim is the positive result of the Federal Reserve’s annual stress test, which saw 33 of the nation’s largest banks clear the minimum hurdle (4.5% Tier 1 common equity ratio). The test evaluates hypothetical negative scenarios, such as unemployment reaching 10%, real GDP falling by 3.5%, and stock prices falling by 55%, and calculates each bank’s ability to withstand these adverse conditions. increase.

The 2022 test came less than half a year ago, and the worst-case scenario deemed by regulators to be a “severe adverse impact” scenario is a “severe It was characterized by a global recession. We are pleased that each bank tested cleared the simulation, which is not surprising given that capital adequacy ratios are now much higher than they were before the Great Financial Crisis.

Indeed, banks are well capitalized and have virtually no bad assets so far. Of course, if the economy weakens, this will change, but bank of america

CEO Brian Moynihan has repeatedly insisted that consumers are in good financial shape. Indeed, Moynihan acknowledged last week that deposit balances have begun to decline, but borrowing and credit quality have not deteriorated significantly beyond historical levels.

Back in November, Robert Reilly, CEO of a major regional bank, said: PNC Financial Services Group (PNC) said: And from a credit standpoint, we have plenty of reservations. ’” he added. We’re focused on investment grade companies, major consumer borrowers, consumer lending is smaller than our commercial side and we’ve been adding for a long time. , we can be well positioned no matter what happens before us. ”

bank is interest

Despite solid 2022 earnings from the aforementioned dominant bank names, the KBW Banking Index (a benchmark stock index for the banking sector representing large US National Money Center banks, regional banks, and thrifty individuals) will be 24% this year. More than %​​ Rising interest rates are likely to continue to be positive for the industry. Sure, more loans will get worse, but the spread between what banks have to pay on deposits and what they pay remains attractive and could be much wider than in recent years. there is.

As a result, the current consensus EPS forecasts for JPM, BAC and PNC in 2023 are $12.88, $3.67 and $16.05, with a P/E ratio for the trio in the 9-11 range. Additionally, dividend yields range from 2.8% to 4.0%.

Warren Buffett says, “Whether it’s socks or stocks, I like to buy quality goods when they’re discounted.”JP Morgan, Bank of America and PNC fit the bill. And I think you are.

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