Little things sometimes mean a lot. Take the case of financial sector stocks. On Friday August 25th the S&P 500 Financial Index (SPSY) out performed the overall market. It wasn’t all that much to make it a headline-grabbing event. Most Wall Street types probably were more concerned about traffic congestion to the Hamptons on a Friday afternoon than boring financial stocks.
You can’t blame them; the SPSY has provided a measly 6% return this year that is just a little over half the market rate of return. Financial stocks have not only been duds, they are one of the more boring groups to begin with.
But that could be changing. The tectonic plates of the financial world are shifting and the shift could allow financial stocks enjoy better times.
Politicizing The Fed
Today, banks are stronger than ever, ten years after the crisis that brought down Bear Streans and Lehman Brothers and threatened the global financial system. Vast sums of additional capital has been raised by issuing equity or low rate long-term debt that their so-called “Capital Position” has improved sharply.
Of course, none of these were voluntary. It took the embarrassment of 2008, the TARP program and the passage of heavy new regulation under the Dodd-Frank Act to force the change.
After a sight of relief that the system did not collapse, money lending went deep into a shell. The mortgage industry all but disappeared, as did small business lending. About the only people that could get a loan were rich folks and they didn’t need the money. In fact, the rich became the biggest source of private lending.
Now the debate begins. Are current-banking regulations restricting the already anemic growth of the US economy? By anemic we are talking about 2% while the Trump White House has promised 3%.
So from a political point of view, the Donald is likely to use whatever excuse is available to blame. With the Chair of the Fed up for grabs in a few months, there is one big duck sitting on the pond: Janet Yellen.
Yellen’s Swan Song
On the very same Friday, those financial stocks outshined the market; Jane Yellen made what amounted to her farewell speech to the annual Fed monetary policy conference at Gran Teton, Wyoming.
In her speech, Yellen lauded the benefits of the Dodd-Frank Act pointing out how increases in bank capital had significantly improved the resilience of the financial system. The media treated her speech as a warning sign to the Trump administration. So far into this administration, POTUS has not reacted positively to things like warnings, suggestions or constructive criticism.
Reading between her lines, Janet Yellen made the statement; it is time for the prisoners to escape from the asylum. I want out of here before having to listen to a bombardment of Trump Tweets and I am going to take the first step.
Climbing Into The Breach
If you are holding financial stocks or thinking about moving your portfolio in that direction, Gary Cohn will help you make that decision. With Goldman Sachs as his financial birth place and President of GS as his last post, you could not find a more idea candidate for Fed chief.
In addition to all of his skills and financial experience, the truth is, Cohn, the current White House chief economic advisor, wants out of his job. News headlines following the Charlottesville debacle point to considerable pressure from Jewish Organizations for Cohn to resign. He even penned a letter of resignation.
As Chair of the Fed, Cohn gains his release from under the thumb of Trump while still having Trumps ear. Once appointed, he can not be fired. It is the ideal solution, Gary is happy, Jewish Organizations are mollified, and Trump avoids another potentially embarrassing resignation.
All of this is not going to happen until Yellen’s current term ends in February. Given the daily turmoil at the White House, many things can happen between now and then.
Frustrated with healthcare and tax reform in Congress, Trump has been a toothless tiger so far in his first year in office. Other than his nomination of Supreme Court Justice Merrick Garland, the post of Fed Chair represents Trumps biggest source of executive power. Reappointing Yellen will never look like a power move. February is just about six months away within focus for even short-term investors.