Financial Stocks to Watch in a Rising Rate Environment

Financial stocks have historically been solid bets in rising-rate environments. Increases in the yields of the 10 and 30-year Treasuries over the past week have tripped the alarm for many investors, who see this and inflation indicators as good reasons to bet on a recession. Tech (XLK, VGT, QQQ) and other sectors are tanking along with the major indices (DIA, SPY) while international tensions mount, leaving investors wondering where they can turn.

Many investors are being encouraged to buy the dip, regardless of the sector. While this strategy may work in the long term, it may be more prudent to find strategies that have worked in historically similar markets. Stocks such as J.P. Morgan (JPM), Goldman Sachs (GS), and Visa (V) are examples of companies which have performed well during months of rising-rates in the past.

Currently regional banks are surging, with the SPDR S&P Regional Banking ETF (KRE) serving as a catch-all, and individual banks such as SVB Financial Group (SIVB) attracting investors in recent days. Bank of America (BAC) has also done well, although a high level of implied volatility in the options market surrounding the stock has some wondering what direction it will take.

Banks are likely, based on historical trends, to be more profitable during rising rate environments due to their ability to create favorable margins in the interest rates they offer banking customers on loans and savings accounts.  Insurance companies (PRU, ALL, BRK.A) also do well with rising rates, historically speaking, since they sit on substantial cash reserves that must earn returns from predominantly low-risk instruments. However, this is not necessarily the whole picture, and things do change. 

Analyst Dick Bove points out that the profiles, exposures, and competition of banks have been changing over time, and the old paradigm may be shifting. Citigroup (C) is one bank that he singles out to serve as an example. With the majority of its loan revenue coming from overseas, it has a relatively high exposure to the cost of money that will not be fully offset by the rates they can earn on loan interest. Bove feels more secure with tech-based financial institutions such as Comerica, Silicon Valley Bank, and PacWest Bancorp.