Bank stocks are widely expected to thrive as U.S. monetary policy normalizes.
Victor J. Blue/Bloomberg
Many investors are asking the wrong question about the stock market.
Rather than trying to figure out what set of facts or events might derail this great bull market, the better move might be to ask which stocks could perform well in a rising-rate environment.
Finding stocks and sectors that are well situated to prosper as the Federal Reserve raises interest rates from historically low levels lacks the dramatic flourish of opining about geopolitical issues. But practical investment approaches are more effective for anyone who values the opportunity to make money over sounding like a market pundit. Bank stocks, for example, are widely expected to thrive as U.S. monetary policy normalizes.
John Marshall, Goldman Sachs’ derivatives strategist, has assembled a list of stocks that are positively correlated with rates, and that are, by some metrics, viewed bearishly by the options market. His list includes financial stocks and ones in other sectors that should benefit from rising rates.
His financial picks include American Express (ticker: AXP),
Citizens Financial Group (CFG), Fifth Third Bancorp (FITB), Huntington Bancshares (HBAN), KeyCorp (KEY), Morgan Stanley (MS), People’s United Financial (PBCT), PNC Financial Services (PNC), Truist Financial (TFC), U.S. Bancorp (USB), and Wells Fargo (WFC).
Other stocks on Marshall’s list include AutoZone (AZO), CF Industries (CF), Eastman Chemical (EMN),
International Paper (IP), Mosaic (MOS), Nucor (NUE), Tractor Supply (TSCO), United Rentals (URI), Waste Management (WM), and WestRock (WRK).
Some may argue that these stocks already reflect expectations of rising rates, but the greater question is what happens when rates actually rise. It’s hard to imagine investors have already decided that stock prices fully reflect the new environment. Many rate-sensitive stocks often react with outsize vigor when the yield of the benchmark 10-year Treasury bill jumps higher, for example.
The practical question then becomes: How can intrigued investors who are interested in rate-sensitive stocks smartly establish, or increase, their exposure in a way that balances risk and reward?
Marshall advised his clients to buy call options, which give holders the right, but not the obligation, to buy an underlying security at a set price and time.
If the underlying stock increases in value, the call should increase, too. Yet calls cost less money than buying the actual stock. If anything happens to upset the market’s exquisite tension—say, a war in Europe—an investor would have less money at risk.
If you discuss these matters at a cocktail party, or over dinner, you will likely bore other guests. But if you must discuss the larger issues that are casting shadows, perhaps note that few people have any material understanding of Russia’s strategic intent regarding Ukraine. The confidence with which people act on matters that are knowable to most only via headlines is peculiar.
Earlier this week, the stock market surged because investors suddenly believed reports that Russia was reducing the number of soldiers that had been amassed along the Ukrainian border.
Many investors cannot accurately analyze the expected quarterly earnings of publicly traded companies, yet the market mob was suddenly confident that they understood the innermost strategic thinking of Russia’s Vladimir Putin.
We must take things as they are and try to profit off the folly of the world—which leads us to stocks that have exhibited a positive correlation with rates.
Steven M. Sears is the president and chief operating officer of Options Solutions, a specialized asset-management firm. Neither he nor the firm has a position in the options or underlying securities mentioned in this column.
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