The TSX Index hit yet another new all-time high on Tuesday’s bullish session of trade. Indeed, the bulls are back, driving stocks much higher. With the tech and growth-heavy Nasdaq 100 leading the way, it certainly seems as though the worst of this brutal first-quarter correction is over with.
Undoubtedly, many investors who didn’t buy at the bottom may be inclined to chase various hard-hit names on the way up. With more believers in the stock market rally and fewer folks pointing to a “bear market bounce,” we may see a continuation of this market melt-up going into April 2022, as investors embrace higher interest rates and more clarity from the U.S. Federal Reserve. Now, the Fed got “transitory” inflation wrong, but they’ve been so incredibly transparent that markets may have reason to bounce so sharply.
Embracing rate hikes and volatility
Although the Fed’s “soft landing” may or may not happen, as the Ukraine-Russia crisis and COVID risks mount, I think that we’ve reached a point where investors are happy that the Fed is ready to beat inflation down, even if it means causing a bit of volatility in broader markets over the near term. Like it or not, the economy can stomach another six or even seven rate hikes from current levels.
Demand is robust, and inflationary pressures are bad news for the longer-term health of the economy. Indeed, there can be no rock-solid economic growth over a prolonged period until inflation can be stomped out. Given the recent selling, I think that as many as seven rate hikes are already baked in, and the curbing of inflation could mean very good things, as we inch out of this crisis towards a booming rest of the 2020s.
In any case, the TSX Index is already surging, powered by many robust blue-chip stocks that probably aren’t done rallying yet. Consider National Bank of Canada (TSX:NA), one underrated banking stud I’d look to buy now.
National Bank of Canada
National Bank stock had a choppy, albeit green session on Tuesday, as investors weighed the possibility that the Liberal government may target the profitability of the big banks. Indeed, such a move would likely take a big bite out of the surging bank stocks. Still, the economic environment is robust, even Goldilocks-like, as the perfect mix of higher rates and strong economic growth kicks in.
National Bank is underrated, in my opinion. It had a strong 2020 but fell flat on the back of a questionable end to 2021. At 10.6 times earnings, I think NA stock is one of the cheapest ways to play the Big Six at this critical market crossroads. With a 3.5% yield, investors can do very well with the name at their portfolio’s core. The rich payout and capital-appreciation potential could help you stay above inflation until it’s nudged back towards the 2-3% target range.
The bottom line
Despite being one of the most resilient banks through the worst of lockdowns, NA stock is back to trading at a relative discount to its peer group. I think the discount is unwarranted and would look for the stock to bounce back quickly once the bank’s disruptive potential becomes more apparent.
