A perfect storm is brewing for bank stocks.
The threat of higher interest rates is hammering growth stocks. The tech- and growth-heavy Nasdaq lost 2.5% on Thursday after Federal Reserve officials hinted that the first of many rate hikes could come in March.
We haven’t seen an interest rate increase since 2018. And now we’ll see at least three in 2022. The Fed is about to tighten the leash on this wild bull market.
I get it if you’re wary of loading up on any assets right now. We’ve enjoyed an incredible bull market run, and looming rate hikes put a damper on that.
But pockets of the market will do better than others as investors seek safety.
Bank stocks are one of those.
How Interest Rates Affect Stocks
Before I get into the financial sector’s future, I want to try to make sense of interest rates.
The Fed sets a few different rates, but the one we need to worry about is the federal funds rate. Financial institutions use this percentage when charging other entities to borrow from them for a shorter term. Right now, that rate sits at 0.25%.
Borrowing at 0.25% interest sounds fantastic to me! Low rates spur everyone from startups and other banks, to big tech behemoths, to borrow, borrow and borrow some more.
When interest rates increase, borrowing becomes more expensive and less attractive.
Higher interest rates mean more money to pay back, and that cuts into future profits. That’s why tech and growth stocks are struggling right now.
So, why not invest in the lenders?
Bank Stocks Will Benefit From Higher Rates
Higher interest rates make borrowing less attractive, but companies need capital to grow.
That puts banks in a solid position.
So, I dug into chief investment strategist Adam O’Dell’s proprietary Green Zone Ratings system to find a way to invest before the impending rate hikes.
And I landed on Wells Fargo & Co. (NYSE: WFC).
Wells Fargo & Co.’s Green Zone Rating on January 14, 2022.
I know — WFC has a “Neutral” rating right now. Neutral stocks are set to perform in line with the overall market over the next 12 months.
But I’ll show you why it wouldn’t surprise me one bit to see Wells Fargo enter the “Bullish” buy zone soon…
Our system is based on historical data (what we know).
WFC’s recent price action, plus Friday’s impressive fourth-quarter earnings report, where it beat earnings-per-share estimates by 25% and revenue estimates by 12%, should push its Green Zone Rating higher. (Bullish stocks rate 61 to 80, and we expect them to beat the market by two times over the next 12 months — so, at the moment, WFC is just 4 points away from Bullish territory.)
And in the short term, WFC is crushing the overall market! Year to date, it’s up around 16% compared to the S&P 500, which is down around 2%.
That’s the kind of maximum momentum Adam and the rest of the Money & Markets team is on the hunt for!
On top of that, take a look at WFC’s ratings in our individual factors.
It rates well in volatility at 78 (high scores here denote lower volatility) and value at 92 — meaning WFC trades at a discount at current prices.
It also pays a small dividend that yields 1.42% at the moment. I don’t complain about free money!
Bottom line: Higher interest rates are setting up a different market for 2022. As growth stocks struggle, investors will flock to high-value plays. That’s a great setup for the financial sector and bank stocks in particular.
Wells Fargo is a bank stock for your shortlist.
Bank Stock Bonus
Green Zone Fortunes co-editor Charles Sizemore wrote about a small regional bank stock in the April 2021 issue of our premium stock research service.
He cited rising interest rates as a major boon for this stock going forward. And he was right on the money.
In the last month, the stock has gained more than 20%! It’s just above our recommended buy zone, but we still expect it to rocket 75% higher over the next two years.
Click here to see how you can join Green Zone Fortunes and gain access to this stock ticker, along with a slew of others tracking today’s top mega trends.
Best investing,
Chad Stone
Managing Editor, Money & Markets