On Thursday, Federal Reserve Chair Jerome Powell reiterated that he and his colleagues are “united in our commitment to bringing inflation down sustainably to 2 percent.” As of the end of September, the Fed’s preferred inflation metric, the Personal Consumption Expenditures (PCE) price index, stands at 3.5%. 

Since March 2022, combating inflation has translated into rapid interest rate hikes, elevating the fed funds rate to the current 5.25% – 5.50% range. Alongside making capital more expensive and suppressing assets relying on high liquidity and cheap borrowing, the hiking cycle has caused a regional banking crisis.

Powell openly admitted that the Fed is operating in a “range of uncertainties” to squash inflation sustainably. Tightening too much could cause “unnecessary harm to the economy,” while not tightening enough could allow “inflation to be entrenched.” 

Moving forward, Powell said that “inflation is still too high,” opening the door for more rate hikes. After the speech, the market has lined up a 62.57% probability for a first rate cut in June 2024, per the CME FedWatch Tool.

The question is, which sectors should investors consider when committing funds in this macro environment?

Banking and Financial Services

Some commercial banks paid the ultimate toll as the fastest hiking cycle since the 1980s unrolled. That’s because their net interest rates margins tightened. Although the fed funds rate raises the cost of borrowing for banks, the banks’ charged rate for loans is typically lower. 

This means reduced net interest rate margins and lower profits. Case in point, Silicon Valley Bank failed to hedge against such risk via interest rate swaps. 

In short, a high-interest environment doesn’t necessarily lead to bank failure. Rather, it leads to banking consolidation. The top large banks, known as Global Systemically Important Banks (G-SIBs), are positioned for performance for several reasons:

• Large deposit base, facilitating larger capacity to absorb losses.
• Diversified loan portfolio, reducing the risk of loan defaults.
• Higher profit margins from spreads between savings accounts and certificates of deposit (CDs), which the banks invest into higher-yielding Treasuries.

Likewise, payment processors gain volume as consumers turn to cross-border spending simultaneously as the saving rate decreases. Visa (NYSE: V) is a defensive stock with a recession-proof business model. Alongside JP Morgan Chase (NYSE: JPM) and Berkshire Hathaway (NYSE: BRK-A), all three stocks have above 20% performance range over the last 12 months.

Consumer Staples

Regardless of the economic macro environment, people need goods. In turn, companies that supply these goods and services are inherently less volatile than other stock types. Colgate-Palmolive Company (NYSE: CL) is one such company, as the global provider of consumer goods for personal, oral, and home care in addition to pet nutrition products.

Moreover, CL is a dividend aristocrat stock, increasing its dividend payouts for over 50 years. Current Nasdaq consensus, based on 18 analyst inputs, places CL shares as heavily oversold, therefore giving it a “strong buy” recommendation. The average CL price target is now at $80.57, with a low estimate of $68 vs the $73.22 price per share at press time.

Two other staple stocks are In the same strong buy category, Walmart (NYSE: WMT) and Procter & Gamble (NYSE: PG). Nasdaq analysts set an average price target of $179.22 for WMT shares. Walmart’s low target estimate is $165 vs the present $159.38 price per share.

PG’s average price target is $164.63, with a low estimate of $143 vs the current $148.69 price per share.

P&C Insurance

Like financial institutions, insurance companies have much of their premiums in bonds and other fixed-income securities. Moreover, property and casualty insurance policies give these companies greater leeway. That’s because they are shorter-term than life policies, enabling timely adjustments to a rising interest rate environment.

The aforementioned Berkshire Hathaway offers insurance exposure as a heavy investor in banking and insurance. Allstate (NYSE: ALL) specializes in shorter-term property and casualty (P&C) insurance. The company is also overhauling its administrative costs by integrating AI for conversation, claims, pattern recognition, and cloud computing.

Case in point, Allstate’s GoodHome app gives users claim cost analysis based on their geolocation and weather patterns. Based on 18 Nasdaq analysts, ALL stock is now in the “buy” category, with an average price target of $128.67. The low estimate is $100 vs the current $124.89 price per share.

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