Finance Stocks Surge on Prospects of Lesser Regulations
The U.S. equity markets closed on a positive note on Friday, riding on the Finance sector’s rally. More importantly, the S&P 500 Financials (Sector) index rose nearly 2% and the Zacks categorized Finance Market industry gained 1.5% compared with 0.7% growth for S&P 500.
The signing of executive order by the President Donald Trump to ease regulations on the financial industry was the primary reason for the rally. Also, improved jobs report for January supported it.
Some of major finance stocks that surged on Friday include Morgan Stanley MS, The Goldman Sachs Group, Inc. GS, JPMorgan Chase & Co. JPM, Bank of America Corporation BAC, Citigroup Inc. C, The Charles Schwab Corporation SCHW and Invesco Ltd. IVZ. These stocks jumped in the range of 2.5–5.5%.
The President has been always in favor of lesser regulations on the finance industry. Hence, the finance sector stocks have been witnessing a rally since the election results in November. Since that day, the Zacks categorized Finance Market industry gained 14% outpacing 6.8% growth for S&P 500.
Why Prospects for Lesser Regulations Cheered Finance Sector
Since the 2008 financial crisis, the finance sector has been in spotlight for heightening the meltdown. So with an aim to curb reckless lending and prevent the need for tax-payers money to bailout large financial institutions, The Dodd-Frank Act was signed into federal law in 2010.
Several provisions for the Act led the finance sector companies to close down/divest operations that were considered risky. It also raised operating expenses given the rise in compliance costs. Further, stringent capital requirements forced these companies to limit investments.
Moreover, it led to the formation of regulatory bodies – the Financial Stability Oversight Council (FSOC) and the Consumer Financial Protection Bureau (CFPB) – that aimed at increased transparency.
The President’s order directs the Treasury Department to review the Act and file a report in four months on probable regulatory changes. Last week White House press secretary Sean Spicer told reporters that “Dodd-Frank is a disastrous policy that's hindering our markets.”
Trump told the business leaders that he expects “to be cutting a lot out of Dodd-Frank”. Further he added, “I have so many friends, friends of mine, that have nice business that can't borrow money ... because the banks just won't let them borrow because of the rules and regulations in Dodd-Frank.”
A Reality Check
In reality, loan growth has remained robust. Banks are increasingly positive of future loan growth as well given the economic recovery and rise in demand for the same. If any business is not provided loan it is not because of the increased regulations. It is the banks’ internal risk management system that allows or denies loans to a particular business.
In fact, banks have become stronger and this is getting reflected in their balance sheets and improved profitability. Moreover, financial institutions have simplified their operations and are largely focusing on their core businesses.
Further, from consumers and borrowers perspective, these regulations have led the financial institutions to increase transparency and better serve their clients.
In case, some of these provisions are repealed, this is likely to hurt consumer confidence on the financial firms.
Nonetheless, it is wait and watch for the investors as well as the finance companies. Until there is some clarity on the future of these provisions, investor sentiment for these stocks is expected to remain bullish.
Of the stocks mentioned above, Goldman sports a Zacks Rank #1 (Strong Buy), while Morgan Stanley, Bank of America, JPMorgan and Schwab carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
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J P Morgan Chase & Co (JPM): Free Stock Analysis Report
Citigroup Inc. (C): Free Stock Analysis Report
Bank of America Corporation (BAC): Free Stock Analysis Report
Morgan Stanley (MS): Free Stock Analysis Report
The Charles Schwab Corporation (SCHW): Free Stock Analysis Report
Goldman Sachs Group, Inc. (The) (GS): Free Stock Analysis Report
Invesco PLC (IVZ): Free Stock Analysis Report
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