Rising bond yields could signal that the decade-old bull run in equity markets is close to peaking. That was the main trigger for the widespread sell-off in US stocks last week, making it the worst 5-day period in a month.
Along with higher Treasury yields—late last week the benchmark 10-year climbed to its highest level in seven years—interest rates are set to push higher as well since the economic indicators show that the American is growing at a healthy pace. Unemployment is at its lowest in almost 50 years, wages are rising and the service industry is hitting records.
With the Fed set to tighten more aggressively in the coming months, risky assets are looking ever riskier. In this environment, financial sector shares could benefit. Two stocks to consider: JPMorgan Chase & Co (NYSE:JPM) and Mastercard Inc (NYSE:MA).
It’s difficult to predict whether the downtrend will persist in the coming weeks given the stubborn nature of this bull market which has bounced back strongly from every correction this year. But if you’re looking to find shelter in the segment of the market which actually thrives in a persistently high-rate environment, look no further than these two financial stocks.
1. JPMorgan & Chase
Investing in financial stocks wasn’t a popular trade in the past decade, especially after the Crisis of 2008 which was brought on by reckless lending practices. Despite this, whenever interest rates rise, banking stocks are generally among the key beneficiaries.
Higher interest rates mean banks are going to make more money on their credit products, including mortgages, credit lines, and savings accounts. Among top US banks, JPMorgan & Chase is a name we recommend when the economy is going strong and rates are headed higher.
JPMorgan Weekly Chart: 2012-2018
JPMorgan’s large, universal bank model makes it one of the most diversified lenders in the US. Its multinational presence as well as it’s market-leading position in many areas of the banking industry make it a much safer bet than many other peers. For example, when the economy is weak and credit demand is low, JPM can benefit from trading, asset management, or investment-banking fees to make up for the profit loss.
The other reason to consider JPMorgan stock now is that it has a much stronger balance-sheet today than it had 10 years ago, after meeting the stringent capital requirements by the Fed. Over the past 10 years, banks have more than doubled their capital, which is their main financial defense against losses.
JP Morgan Chase, which is currently trading at 114.62, is seeing profits surge on the back of the stronger economy and tax incentives offered by President Trump’s administration. Earnings rose 18% in the second quarter and the lender is well on track to make $111-billion in revenue this year, and $34 billion in earnings.
Mastercard (NYSE:MA), the second-largest US payment processing company, is another clear winner if the central bank continues to hike interest rates.
Mastercard Monthly Chart: 2012-2018
Mastercard shares have surged more than 200% in the past five years, helped by strong consumer spending and the global shift in payments from paper to plastic. For companies like Mastercard, rising wages mean people will have more money to spend on goods and services.
US consumer spending—which accounts for more than two-thirds of the country’s economic activity—was on track to grow at about a 3.6% rate in the third quarter, close to the 3.8% pace set in the April-June period.
In the most recent quarter, the credit card company’s profit rose 33% to $1.57 billion, while net revenue rose 20% to $3.67 billion. Gross-dollar volume for the company’s credit, charge and debit programs rose 15.3% worldwide to $1.48 trillion, beating analyst expectations of $1.46 trillion.
Mastercard shares look attractive after a recent dip from a record high of $225.35. The stock is currently trading at $213.26 which is 5% below its record high. Analysts, on average, expect about an 8% jump in the share price during the next 12 months.
It’s better to focus on stocks which have a history of beating the market when interest rates climb. Both JPMorgan and Mastercard have great earnings momentum that will help their shares propel higher when rate-sensitive stocks come under pressure.