Shrug Off Growing Inflationary Fears With 5 Financial Picks

The U.S. stock markets have been reeling from severe volatility since February owing primarily to inflationary concerns. Investors remain apprehensive as inflationary tendencies are evident in multiple areas of economy. Market’s expectations of a higher inflation have been fanned by massive tax cut, strong fundamentals of the U.S. economy, robust labor market, higher consumer spending and geopolitical conflicts.

Notably, the markets are concerned that higher inflationary expectations will lead to the central bank raising the interest rate aggressively to stabilize the economy. However, a hike in interest rate will raise cost of funds which in turn will enable the financial sector to increase the spread between longer-term assets, such as loans, with shorter-term liabilities, thus bolstering the sector’s profits. Consequently, investment in financial stocks with favorable Zacks Rank is a lucrative option at the moment.

Strong Retails Sales Data

On May 11, the Commerce Department reported that U.S. retail sales rose 0.3% for the month of April, at par with the consensus estimate. Retail sales are up for two straight months and also rose 4.7% year over year. Notably, nine out of a total of 13 industries witnessed an increase in sales in April. Investors fear that higher consumer spending may generate inflationary pressure prompting the central bank to pursue aggressive interest rate policy to cooldown the economy.

Geopolitical Conflicts

On May 17, the July Brent Crude (LCON8) touched $80.50, its highest level since November 2014. This was fueled by the concerns regarding the United States re-imposition of sections on Iran which will limit the oil production of Iran and elevate the oil prices. Although the higher oil prices may spur capital spending by oil producers, it is likely to take a toll on consumers. However, elevated capital spending may result in higher wage rate.

Robust Labor Market

The unemployment rate declined from 4.1% in March to 3.9% in April, the lowest level in nearly 18 years. This is the first time in six months that the unemployment rate has undergone a decline. Healthy non-farm payrolls data for April along with continuing decline in the weekly jobless claims is a clear indication of the employers’ intentions to continue recruiting. This may result into wage growth generating inflationary tendencies.

Our Top Picks

Strong earnings, massive tax cuts and solid economic data are likely to boost consumer spending in the coming months driving the price level up. This may prompt the Fed to aggressively implement tight monetary policy. Higher interest rate will eventually aid the banking industry. Non-banking financial institutions, including insurance companies, asset managers and brokerage firms, should also gain.

We narrowed down our choice to five banking stocks with a Zacks Rank #1 (Strong Buy) and solid growth potential. You can see the complete list of today’s Zacks #1 Rank stocks here.

Chart below depicts price performance of our five picks in last three months.

Civista Bancshares Inc. CIVB is involved in the business of community banking, through its subsidiaries. It operates primarily in Ohio. The company is headquartered in Sandusky, OH.

Civista Bancshares has expected earnings growth of 30.8% for current year. The Zacks Consensus Estimate for the current year has improved by 8.8% over the last 30 days.

First Financial Northwest Inc. FFNW serves the Puget Sound Region of Washington that includes King, Snohomish and Pierce Counties, through its full-service banking office. The company is headquartered in Renton, WA.

First Financial Northwest has expected earnings growth of 46.1% for current year. The Zacks Consensus Estimate for the current year has improved by 15% over the last 30 days.

Blue Hills Bancorp Inc. BHBK provides consumer and commercial deposit as well as loan products. The bank offers commercial and industrial and commercial real estate loans in addition to commercial checking and savings accounts. The company is headquartered in Norwood, MA.

Blue Hills Bancorp has expected earnings growth of 64.3% for current year. The Zacks Consensus Estimate for the current year has improved by 10.8% over the last 30 days.

Walker & Dunlop Inc. WD is engaged in providing commercial real estate financial services in the United States, with a primary focus on multifamily lending. The company is headquartered in Bethesda, MD.

Walker & Dunlop has expected earnings growth of 10.7% for current year. The Zacks Consensus Estimate for the current year has improved by 22% over the last 30 days.

The Progressive Corp. PGR provides personal and commercial property-casualty insurance, and other specialty property-casualty insurance and related services primarily in the United States. The company is headquartered in Mayfield Village, OH

The Progressive has expected earnings growth of 52.1% for current year. The Zacks Consensus Estimate for the current year has improved by 2.8% over the last 30 days.

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Civista Bancshares, Inc. (CIVB) : Free Stock Analysis Report
 
Blue Hills Bancorp, Inc. (BHBK) : Free Stock Analysis Report
 
First Financial Northwest, Inc. (FFNW) : Free Stock Analysis Report
 
Walker & Dunlop, Inc. (WD) : Free Stock Analysis Report
 
The Progressive Corporation (PGR) : Free Stock Analysis Report
 
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