Rosy Forecasts With a Few Dark Clouds

Since President Trump’s election, investor enthusiasm has helped to propel equity returns into new territory – with gains during his first month in office that have not been seen since LBJ took office. The prospect of major infrastructure spending, coupled with corporate tax reductions and the repeal of regulations imposed during the Obama era have caused a wave of optimism, especially in the industrial and financial sectors. The Fed’s decision to raise interest rates was an additional plus – especially as the increases are to be made in gradual, modest increments to avoid jeopardizing the ongoing economic surge.

As always, when bubbling optimism surfaces it is usually wise to dig a little deeper because reality is always more complicated. Enthusiasm has waned somewhat following the President’s failed effort to repeal the Affordable Care Act in March, which demonstrated that radical overhaul and change doesn’t happen overnight – especially in D.C. The end of April saw the markets pull back as analysts reacted to the President’s tax plans –traders’ initial enthusiasm was dented by concerns over the lack of detail in the corporate tax cut proposals. Some suggest the market may have jumped the gun with such a big post-election run-up. Analysts and individual investors, too, are wondering about the timetable for Trump’s corporate tax reform and deregulation efforts, noting that healthcare reform did not happen as the Administration had hoped.

The banking sector – an industry tipped to be a major winner in the dismantling of regulations – has been the focus of many analysts’ predictions. Here’s what Wall Street gurus currently are saying about the prospects for financial stocks.

• First quarter results for Wall Street banks have been generally good – spurred by the anticipated roll-back on financial regulations imposed during the Obama administration. Estimates suggest that the top five Wall Street banks rose by an average of 20 percent in the first quarter of 2017 as compared to a year earlier. Within these banks, underwriting and fixed income trading were healthy, with equity trading remaining flat. Morgan Stanley reported the best results among Wall Street firms, showing fixed-income revenues that almost doubled over the previous year. Goldman Sachs did not perform up to analysts’ expectations, although it must be noted that its net income was also double that of the previous year. Much of the analysts’ disappointment centered on Goldman’s hedge fund performance – a less active segment and an area of specialization that Goldman Sachs relies upon more than its competitors.
• Main street, or regional, banks did not match the dazzling results of the Wall Street banking fraternity. Loans grew by only 0.7 percent in the first quarter of 2017 – the slowest rate in about six years. Commercial and industrial lending declined as did residential mortgage lending. These results demonstrate that smaller banks continue to struggle in the post-Dodd-Frank regulatory environment, and suggest the possibility of significant upside when the Administration dials back the strict regulations currently in force. Of course, the key question is how quickly this is likely to happen. The healthcare reform failure suggests that it might be unwise to expect a swift passage.

Overall, the outlook for banking is fairly rosy. The U.S. economy is performing well, the Fed seems likely to continue to raise interest rates, and Wall Street will probably benefit as Europe emerges from its prior slump.

As always the above is general commentary and not intended to replace professional counsel from your tax and investment professionals.

These articles are intended to provide general resources for the tax and accounting needs of small businesses and individuals. Service2Client LLC is the author, but is not engaged in rendering specific legal, accounting, financial or professional advice. Service2Client LLC makes no representation that the recommendations of Service2Client LLC will achieve any result. The NSAD has not reviewed any of the Service2Client LLC content. Readers are encouraged to contact their CPA regarding the topics in these articles.

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