Bank of America Starts Countdown Clock on Interest Rate Hikes

NEW YORK (TheStreet) -- At times, it seems like speculation on interest-rate hikes have been going on almost as long as the Fed's near-zero interest rate policy.

While most banks are confident that rates won't be raised this week, opinions vary as to what will happen in September. Bank of America (BAC), for one, is so confident the Fed will act then that it has started a virtual countdown clock.

The Charlotte, N.C.-based company is one of several banks that released reports in the past few days analyzing both the timing of an increase and its effects. In a note boldly titled "The Thundering Word," Michael Hartnett, the bank's chief investment strategist, wrote that there are 66 trading days to go until the Fed raises rates. While other banks spoke of a "likely" or "near certain" September rate-hike, Bank of America doubled down by providing a timeline of trades as the Fed unwinds its years of easy monetary policy.

"Using the classic Fed roadmap," Hartnett wrote, traders will invest in emerging markets and U.S. stocks on June 17, three months before the hike, while shorting gold, the euro and the Japanese yen. On Sept 17, presuming the Fed raises rates then, they'll go long on commodities and short U.S. stocks. Later, as rates climb higher, investors will allocate more to Europe, emerging market equities, U.S. technology stocks and cut exposure to investment-grade bonds, he wrote.

Goldman Sachs (GS) took a much more cautious approach to the timing of the first rate hike. A note written by Kris Dawsey, U.S. economist at the New York-based bank, went with an undisputable fact: "The expected date of the first hike in the federal funds rate is closer than it has been at any point so far in the recovery."

While much has been said about Goldman Sachs' extensive reach, the bank has not so far been able to alter the space-time continuum in such a way as to make that statement more true in the past than in the present.

Goldman says a rate hike remains likely in September even though it hinted in a note in early June that such a move may not be prudent. Still, the market has already priced in a 60-65% probability of an increase, the bank said.

As for how a rate hike is likely to play out, bank stocks serve as what Bank of America calls a "Fed policy mistake barometer."

When rising rates coincide with rising bank stocks, the outlook for the economy is good; when the opposite occurs -- rising rates prompt a decline in stocks -- the outlook is poor.

The former indicates that banks are able to grow amid rising rates while the latter hints at a breakdown between Fed policy and banks' ability to deliver shareholder value.

The chart below suggests that now would be a good time to raise rates since the two metrics are moving in tandem. This time last year, there was a divergence in the movement of U.S. bank stocks and the 5-year Treasury note.

 

Of the banks poised to do well when rates rise, Goldman Sachs offers the following: Bank of America, JPMorgan Chase (JPM), Regions Financial (RF), and M&T Bank (MTB). Their investors are likely to benefit before their customers, however.

As anyone with a savings account knows, interest rates on deposits have also been near zero, and unfortunately, a Fed rate hike alone does not mean that account holders will immediately start earning interest.

The lag could be a boon to banks' shareholders.

"While we agree with this notion given the historical lag in deposit repricing versus re-pricing in bank assets," Goldman Sachs writes, "we think that many investors are not fully aware of this possibility and thus could be positively surprised by the earnings upside following the first few rate hikes."

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