Last month was difficult for the equity markets. This wasn't too unexpected; the "September Effect" is a well-known phenomenon. However, it was the stock market's worst September in over a decade.
All three main U.S. equity indexes took a tumble. The Dow Jones dropped by 3.5%, the Nasdaq by 4.6%, and the S&P 500 shed 3.9%. There are several reasons for this. As mentioned earlier, September is traditionally a difficult month. But there were two other significant factors at play.
Supply Chain Disruption
Firstly, supply chain disruption caused many U.S. companies to revise their earning predictions. With COVID-19 cases surging in the U.S. and worldwide, businesses are being affected by logistical issues.
As a result, companies can't meet demand. These production failures translate into fewer sales, which will show up as fewer profits in future quarters. Another aspect of the supply chain issues is higher material and labour costs.
Rising Interest Rates
Second, rising bond yields are bad news for many of the tech giants. Bond yields have gone up because the market expects strong economic growth. However, if increasing interest rates accompany this growth, it will harm companies with high valuations based on future profits. Higher interest rates mean the profits these giants promise in the future will be worth far less.
So, with tech and manufacturing stocks facing challenging headwinds, which stocks can benefit?
Which Stocks Can Benefit from Supply Chain and Interest Rate Issues?
CNBC's Jim Cramer sees this recent downturn as an opportunity to pick up specific stocks at a discount. He believes that investors with an eye on the long term could use this opportunity to add some big tech stocks to their portfolio. Rising bond yields took a chunk off Apple, Amazon, and Salesforce in September.
Another sector that has been performing well are bank stocks. Bank stocks have performed well in 2021, but they are still considered cheap by many analysts.
As the U.S. economy recovers from the pandemic, experts suggest the Federal Reserve will tighten monetary policy. If the Fed increases interest rates late next, it will significantly benefit lenders profits.
The KBW Nasdaq Bank Index closed out the month strongly. It's up 37% already this year. At this rate, bank stocks are set to have their best year in almost two decades.
The Fed's latest dot plot suggests 9 out of 18 officials anticipate a rate hike in 2022. This number is up from seven in June. Additionally, Jerome Powell, Chair of the Federal Reserve, has indicated that the central bank is likely to scale back some of its substantial bond purchases.
For banks who are sitting on long-term loans, an interest hike will add to their earnings. These future profits are reflected in bank stocks outstanding performance. All 24 KBW Nasdaq Bank Index members are up at least 3.5%, with half of the index up by 10%.
Three banks that investors should consider are Bank of America (NYSE: BAC), JPMorgan Chase NYSE: JPM), and U.S. Bancorp (NYSE: USB). Bank of America because of its excellent asset quality, JP Morgan Chase for its high profits and innovative fintech, and U.S. Bancorp for its reliable and consistent earnings from stable consumer products.
As the pandemic continues to play havoc across the globe, supply chains are beset with logistical issues. Hold-ups in supplies and materials have forced many companies to revise earning predictions. On top of this, rising interest rates are making the future earnings of tech companies less appealing to investors.
However, if interest rates continue to rise, holdings in banking stocks are a good idea. Higher interest rates mean higher profits on loans. If the Fed make it official in 2022, as expected, bank stock prices could keep rising.
Any stock has to however meet my approved list criteria and I will share more of these names going forward.