Rising interest rates may be a curse for consumers, but they are beneficial to financial institutions.
That's the takeaway from a series of recent earnings reports by the biggest names in the business. Wells Fargo (WFC) , Citigroup (C) , Goldman Sachs (GS) , and JPMorgan Chase (JPM) all posted earnings and revenue figures that beat analysts' estimates for the recently ended quarter.
On a basic level, financial institutions are lending money at higher rates than they have in years. For example, according to Freddie Mac, lending rates are at a 20-year high, with the average rate on a 30-year fixed mortgage at 6.92%. That's just one example of the positive effect of higher rates on the financial sector.
Does a profitable banking sector translate to a bullish stock market? Not necessarily. What matters most is the effect these higher rates will have on the economy as a whole.
In a recent interview, JPMorgan's CEO Jamie Dimon said that he expects the U.S. to enter a recession six to nine months from now. Goldman Sachs' CEO David Solomon echoed that sentiment during a Tuesday morning appearance on CNBC's Squawk Box, saying there's a "good chance" of a recession.
Since downturns in the economy are often accompanied by selloffs in the markets, it should come as no surprise that Dimon also said stocks could easily fall 20% from here.
Talk is cheap, but money speaks louder than words. JPMorgan's cash position of $1.2 trillion tells me the investment bank expects to see lower stock prices in the near term.
I wouldn't buy JPMorgan here. While the stock has gained 11% over the past three trading sessions, it's still down 26.82% for the year. Despite its recent rally, JPMorgan continues to trade in a bear channel (diagonal lines), extending back to January.
Chart Source: TradeStation
JPMorgan remains well below its 200-day moving average (red). The stock last closed above that key indicator on January 13 of this year.
Signs of the coming recession continue to appear. The latest signal involves XPO Logistics (XPO) . On Monday, the trucking company said it expects third-quarter revenue to come in lower than previous estimates.
Much like JPM, XPO Logistics is in a bear channel, and is trading well below its 200-day moving average (red). XPO is down 37.39% year-to-date.
Chart Source: TradeStation
As with FedEx (FDX) , which announced similarly disappointing news last month, XPO's warning is indicative of a general slowdown in business activity. While FedEx is known for handling parcels for both businesses and individuals, XPO is focused almost entirely on freight, making it a more accurate barometer for business activity.
In this rising interest rate environment, we shouldn't be surprised to see banks doing well. We might even see a short-term rally, as I indicated here.
Now that earnings season is kicking into high gear, we're about to find out how those higher rates are affecting the economy as a whole.
