The broader markets have felt the weight of rate hikes for well over a year now. The good news is that the U.S. Federal Reserve (the Fed) seems ready to slow the pace. Though it can easily pick up the pace if it dues necessary (it all depends on the economic data that comes in), most investors may find comfort in having most of the pain already in the books.
Though the Bank of Canada and Fed likely have more hikes to go before backing off entirely, I think investor anticipation of the beginning of the end of the rate-hike cycle is in play. With that, investors may have less to fear of rate hikes, given many companies have done a reasonably decent job of dodging and weaving through the punches.
Rate hikes aren’t finished quite yet: Could investors be getting ahead of themselves?
Who would have thought a big-tech firm like Nvidia (NASDAQ:NVDA) would be at fresh new highs, just under a year after seeing shares fall to depths that implied a 66% decline from peak to trough. Indeed, a 66% drop is quite staggering. The ensuing recovery, though, was even more jarring. It goes to show how quickly fear and horror can turn to greed and euphoria. The key is buying when the former emotions dominate Wall Street and lighten up (or at least hold off) when the latter grips the hearts of investors.
Just because tech is blasting off doesn’t mean rates won’t keep climbing. Many pundits see a few more rate hikes left to go. If inflation proves stubborn and the economy holds its own, don’t be so surprised if there are a lot more rate hikes to go. And if that’s the case, tech could be in for more turbulence. However, I think a sector-wide repeat of 2022 is out of the cards.
In this piece, we’ll look at two stocks that I believe can ride out more rate hikes, as the Fed considers options following its latest “hawkish pause.”
TD Bank: The perfect safety stock for a high-rate world?
A weaker economy is never good for any bank, as loan growth begins to stall. Still, high rates are good news for deposit-heavy retail banks, just like TD Bank (TSX:TD). As rates rise, so too can profit margins, including NIMs (net interest margins) on deposits. I’ve noted of this effect in many prior pieces.
Indeed, better margins but modest loan growth numbers could paint a relatively muted picture overall. However, I believe a bull-case scenario could play out for TD over the next year and beyond.
Picture a scenario that sees a strong post-recession recovery and a “higher-for-longer” type of rate environment. I think a rebounding economy with high rates could be the perfect tailwind for the big banks. Sure, a recovering economy and falling inflation could give central banks flexibility to cut rates.
Given inflation’s stickiness, though, count me as unsurprised if rates are kept high for longer than expected, just to be safe. Just to ensure the inflation genie has, in fact, returned to its bottle, where it may stay dormant for (hopefully) another few decades.
The bottom line
All the big banks would benefit from a strong economy with higher rates. TD is the one I’d prefer, though, given its strong retail banking business and its extremely discounted multiple that’s been dragged lower this year due to what I’d call a “perfect storm” of negative headlines. At 10 times trailing price to earnings, TD stock may very well be one of the TSX’s best big-cap bargains today.
If rates fall, TD will be all right. But if rates stay higher for longer, TD could be in a spot to hit new highs, perhaps in a hurry.
