Merry Christmas and Happy Holidays to you and yours.
I know — you’ve probably got a lot going on this Christmas Eve, so I will be brief…
In case you missed it, between July and September, the U.S. economy did something it hadn’t done in over a decade: It grew at a 5% rate.
Amazing as it may seem, the economy finally seems to be busting out of its post-financial crisis funk.
It had to happen eventually. The employment market has been improving, and Americans have been saving more money, so people have a bit more cash in their pockets. And the Consumer Confidence Survey shows we are feeling better about the economy.
You would expect people to spend more money when they feel better about the future, and that’s what’s happening now. Household purchases were up 3.2% in the third quarter, and personal consumption rose 2.2%. These are good numbers.
Without a doubt, the U.S. economy is the strongest in the world. As it should be.
It was good timing by the Fed to end QE when it did…
I know I’m not going to win any popularity contests by saying anything nice about the Fed. And I really don’t have much nice to say anyway… I’m not convinced QE was really helpful, except that it was a blatant attempt to prop up stock and bond prices. As an investor, sure, I like the prices of my stocks to go up. But I also think the Fed took an unnecessarily risky gamble and got lucky.
Plus, the Fed opened a Pandora’s box of direct intervention, and you just know the next time there is an economic downturn, the Fed will intervene again.
I also think the Fed should’ve hiked interest rates a little bit before now. But that’s coming soon enough…
What to Do When Interest Rates Rise
If you read my 2015 predictions article, you may recall I forecast that the Fed will hike interest rates three times in 2015, a quarter-point each time.
This may be one of the more aggressive projections you’ll see, but that 5% GDP number backs me up…
Interest rates are going higher in 2015.
In general, rising interest rates are a good thing, as they signal an expanding economy. Typically, we will see stock prices decline for a couple weeks after the first rate hike and then start moving higher.
But there is one sector for which higher interest rates are unequivocally bullish, and that’s bank stocks. Bank stocks will do well with higher rates because they make more off the spreads — the difference between short- and long-dated bonds.
Spreads have been tight because of the Fed’s zero-interest rate policy and QE. Right now, the 10-year Treasury note yields 2.19%, and the 30-year yields 2.89%. That’s ridiculously tight.
If we get spreads back to a more stable level — say 3% for the 10-year and 5% for the 30-year — banks will make more money.
So this is a good time to buy Bank of America (NYSE: BAC).
Yes, I’ve recommended Bank of America here in Wealth Daily before. My Wealth Advisory subscribers have owned it since it traded for $9.40.
At its current price of ~$17.80, they’ve very nearly doubled their money on this stock. And 2015 will be a very good year for the company.
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2015: Bank of America
For starters, you should know that BofA has paid off the last of its mortgage settlements. This year, finally, we get to see what the bank can earn without massive settlement costs eating into earnings.
Analysts expect earnings to triple from $0.45 this year to $1.48 in 2015. So instead of the $5 billion in net profits the bank earned in 2014, we should see something like $15.5 billion in profits for 2015.
And that will mean more money in your pocket…
You see, BofA had to basically eliminate its dividend after the financial crisis. Last year, it was finally allowed to pay out a nickel each quarter to shareholders.
But the massive jump in profits in 2015 means that a big jump is coming for that dividend. It should at least double — from $0.20 a year to $0.40. And it may well do better than that.
Bank of America has a ways to go yet to get back to its pre-crisis highs around $50. Still, the stock can easily make a 40% jump to the $25 level.
So give yourself the gift of Bank of America this holiday season. You’ll be glad you did.
Until next time,
Until next time,
Briton Ryle
@BritonRyle on Twitter
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A 21-year veteran of the newsletter business, Briton Ryle is the editor of The Wealth Advisory income stock newsletter, with a focus on top-quality dividend growth stocks and REITs. Briton also manages the Real Income Trader advisory service, where his readers take regular cash payouts using a low-risk covered call option strategy. He is also the managing editor of the Wealth Daily e-letter. To learn more about Briton, click here.
