It’s an old saw — higher interest rates are bad for banks. So every time interest rates tumbled this year, as they did throughout August, bank stocks rallied.
But the conventional playbook about rates and financial stocks may not be accurate in the current environment, which should prompt a re-evaluation of the sector’s recent strength, and what it says about the outlook for the economy and Federal Reserve policy.
Financial stocks are “not very well understood,” Davis Financial fund co-managers Christopher Davis and Kenneth Feinberg wrote in their summer commentary. “Rising interest rates do not inherently threaten profitability at all financial service companies.”
Among the fund’s top holdings at the end of June was Golden West Financial, which makes almost all of its loans adjustable rate. The savings and loans business “will thrive during the current period of rising rates,” Davis and Feinberg wrote.
And thanks to the glaring, can’t-miss warnings from the Fed that rate hikes were on the way, many more traditional financial institutions have been turning their balance sheets upside down to get ready for higher rates.
For this complete story, please visit Higher Rates Aren’t So Bad for Banks, After All.
