The Goldman Sachs Group Inc (GS) Gold Rush

Interest rates have been surging lately for a ton of different reasons. The economic climate is getting better, and eventually we’ll see the Fed bump up the price of debt. Increased lending and investment spending is also a factor that’s spiking interest rates to the highest levels they’ve been since 2011.

It’s a bear-bond market ladies and gentlemen; let’s find a good way to take advantage of it.

As usual, I like to present two different options in order to appeal to different risk tolerances and income preferences. Different strokes for different folks, right?

Has anyone else noticed this?

The head of market research for Goldman Sachs Group Inc (NYSE:GS) in Europe, Francesco Garzarelli, projects an even longer upward trend in the 10-year treasury note yields. But when you look deeper into the company he’s presenting from, you realize something. Goldman Sachs Group Inc (NYSE:GS)’s stock price has an insultingly obvious correlation with the 10-year treasury yield. It’s like Mr. Garzarelli is prodding us to invest in the company for which he’s reporting.

GS data by YCharts

Why is this the case?

Goldman Sachs Group Inc (NYSE:GS)’s unique business model consists of investment banking, client services, investing and lending, and investment management. I may be grossly oversimplifying the company, but when big market moves like this occur, Goldman Sachs Group Inc (NYSE:GS) generates tons in institutional client services to move money around. Not to mention, given a better economic climate, Goldman Sachs Group Inc (NYSE:GS) saw a 12% spike in revenue from investment banking in the first quarter.

And even though higher interest rates might eventually drive down activity, Goldman Sachs Group Inc (NYSE:GS) seems to do well in a high interest rate environment. Their investing and lending segment is their second largest revenue stream and will certainly do better as interest rates rise and Goldman can charge higher spreads on interest.

A steadier (and much more boring) alternative

Wells Fargo & Co (NYSE:WFC) stock has done pretty well lately. The bank holding company, while still in finance, has a very different business model from Goldman Sachs. Wells Fargo has managed to out-preform Goldman Sachs’ stock. The company’s new business model has provided more steady money streams, illustrated here.

Source: Wells Fargo Investor Relations

Wells Fargo & Co (NYSE:WFC) has been moving towards a fee-based business model, which provides a completely different income to that of Goldman Sachs. This strategy, coupled with their limited downside risk, is the reason why they’ve out-preformed Goldman in previous years. Wells Fargo is swayed less easily by the moves in the market, and the company proves to be much more consistent than Goldman Sachs.