2016: Learn to Love Your Banks
The Fed is going to start raising short term interest rates very soon. Even though the Fed will continue to raise rates at a very modest rate over the next couple of years, this will be the first in a series of rate hikes unless our economy does a U turn.
Although rising interest rates can be hard on stocks in many industry sectors, one of the clear winners of rising rates should be large U.S. banks. The reason is simple; banks make more money on their new loans as interest rates rise. (They know how to raise rates on loans faster than their cost of money rises.)
Since the financial crisis of 2008-2009 big U.S. banks have, for the most part, cleaned up their loan portfolios, paid the lions share of their fines and adapted to their new regulatory requirements. As well, their stocks are trading at low historic valuations and they’ve started to rebuild their dividend programs. (Pre-crisis banks were one of the most dependable payers of substantial dividends.)
So, we see a bright future for banks’ business and a good entry point for investors who appreciate reasonable valuations and rising income from dividends.