Goldman Sachs ( (GS) ), Citigroup Inc. ( (C) ) and JPMorgan Chase & Co. ( (JPM) ) all fell in afternoon trading on Thursday after the Federal Reserve said it's raising benchmark interest rates by a quarter of a percentage point, as well as signalling two more rate hikes this year. In the long run though, a more hawkish Fed could bring big gains to bank stocks, experts say.
"Banks greatly benefit in a rising rate environment as their lending margins improve," David Bickerton, MDH Investment Management, Inc in Ohio said. "This week's rate hike was already priced into the market given that raising rates at the June meeting was a near certainty. Historically speaking, rates are still low and banks are moderately priced compared to other sectors in the market."
Rate hikes increase banks' profitability overnight. Fed Chairman Jerome Powell's preference for tighter monetary policy means that even more rate hikes are likely after the two planned increases this year, giving bank stocks potential for substantial growth, according to Gordon College Finance Professor Alexander Lowry.
"This is all great news for banks," Lowry said. "Every time rates rise, banks, especially the largest and best like J.P. Morgan, mint money. So banks are thrilled to see rates rising."
This doesn't mean that investors should run out and buy banks stocks tomorrow, Lowry said.
"While now is a great time to be owning the best banks you need to cautious and ensure you buy them at the right price," Lowry said. "Others are piling into banks with rates rising so stocks have been rising. It's especially important to be cautious just now because the recent correction may not be over just yet. And several broad market sentiment indicators suggest another short-term pullback is likely, so you might get a better entry point for the bank stocks."
Goldman rose one cent to $233.94, Citigroup lost $1.01 to $66.28, and JPMorgan dropped $1.59 to $108.38 near the end of Thursday trading.