12 financial stocks worth a look as interest rates start to rise
Banks, credit services and brokerage companies often get a boost when interest rates go up. The Fed just started hiking rates, so is it time to buy?
With the Federal Reserve raising interest rates, there’s reason to think banks and financial institutions will benefit. That’s because higher interest rates mean more profits as banks take advantage of lower interest paid to customers and higher interest earned from loans and investment.
Last week we saw the first rate hike with more to follow this year and into 2023. Top US banks in fact saw their share prices go up in the past few trading sessions.
So are banks and financial institutions the bet to make in an environment of high inflation and rising interest rates? There’s no guarantee, but history says they are worth a look.
1. Banks
Three of the big four banks are down year to date, with the exception being Wells Fargo. This bank and Bank of America are the two that had positive returns in the past 12 months even without rising interest rates. The new environment could help them outperform in the next 12 months as well, and they have risen most recently.
| Last 5 days | Year to date | 12 months | |
|---|---|---|---|
| Wells Fargo (WFC) | 4.6% | 5% | 39% |
| Bank of America (BAC) | 4.6% | -4.8% | 19% |
| JP Morgan (JPM) | 5.7% | -11% | -4% |
| Citigroup (C) | 2.6% | -8% | -18% |
2. Asset managers and brokers
Similar to banks, this type of company also benefits from high-interest rates. After the rate hike, most companies in this sector started to go up. Charles Schwab Corporation was one of the few brokerage companies that outperformed the S&P 500 and most of its peers in the past 12 months.
| Last 5 days | Year to date | 12 months | |
|---|---|---|---|
| Ameriprise Financial (AMP) | 8.2% | 1% | 38% |
| Northern Trust (NTRS) | 3.6% | -2% | 19% |
| State Street (STT) | 5.4% | -4% | 13% |
| Charles Schwab (SCHW) | 8.5% | 7% | 45% |
3. Credit services
Companies that provide credit services like Visa, American Express and Mastercard also tend to perform well in a climate of rising interest rates. Aside from Amex, which had a solid run in the past 12 months, other companies like PayPal could definitely use some boost.
| Last 5 days | Year to date | 12 months | |
|---|---|---|---|
| American Express (AXP) | 6.8% | 13% | 40% |
| Visa (V) | 4% | -1% | 4.9% |
| Mastercard (MA) | 2.2% | -5% | -1% |
| PayPal (PYPL) | 15% | -39% | -51% |
Of course, there’s no guarantee that these companies will outperform the broader market in the next 12 months, and the reaction of a few days can be a head fake. But rising interest rates will most likely help the industry raise profits.
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