How Much Will Banks Actually Benefit From Trump’s Nixing Of Dodd-Frank?

From Brad Hoppmann: During the presidential campaign, candidate Donald Trump often criticized Wall Street and the banking system for its role in America’s financial difficulties.

On Friday, President Trump did an about-face of sorts. He embraced some of Wall Street’s brightest luminaries and did something that the financial industry has wanted for nearly seven years.

The president signed executive orders that begin the process of rolling back financial industry regulations.

With industry leaders such as Larry Fink, CEO of BlackRock (BLK), and Jamie Dimon, CEO of JPMorgan (JPM), gathered around him, Trump proudly put his signature on executive orders designed to dismantle Dodd-Frank.

The 2010 law was put in place as a response to the 2008 financial crisis. But critics say it stifles bank activity, and tightens bank lending.

Now, the Trump administration has essentially laid out at least the beginnings of a framework that’s aimed at undoing those regulations. The executive orders instruct heads of regulatory agencies to report back to him within 120 days with suggestions on ways to change existing financial regulations.

As you might expect, banking and financial stocks vaulted higher on the news. Now the question is who will likely benefit most, and what does that mean for investors?

That’s the conclusion from sector analysts at Morningstar. In an article on the company’s website, Morningstar analysts offered up the following assessment of the Trump action:Despite the rise in large-cap financial stocks Friday (and since Election Day), at least one group of analysts says that any banking deregulation is “no panacea for big banks.”

We see Trump’s plans as an opening salvo in an effort to ease the regulatory burden on the nation’s banks. However, efforts to repeal or replace the law in its entirety will be far more difficult, and we don’t expect significant boosts to banks’ profitability in the near future as a result of the rule review alone.

I agree with the assessment that the “near future” isn’t likely to see a jump in bank bottom lines. After all, Washington’s wheels grind slowly, and any rewrite of the Dodd-Frank law will take time.

It also will cost the president some significant amount of political capital.

Yet that doesn’t mean financial stocks won’t continue to trade higher based on the expectation of a lightened regulatory burden.

After all, think about the run higher in not only financials, but in the major market indices nearly across the board since Election Day.

The Financial SPDR (XLF) is up 13.5% since the U.S. election.

Sure, the economic data has improved over the past couple of months (albeit slightly). But that’s not the reason for the buying.

The reason for the buying is all about the great expectations of growth that might be engineered by the Trump policies.

A rollback of Dodd-Frank and other financial industry regulations is a step in the right direction in terms of making that growth a reality. But there’s still a long way to go before we can actually start seeing corporate bottom lines benefit.

The same is true for the all-important corporate tax reform proposals.

Wall Street would love to see corporate taxes go to 20% from 35%. In fact, the Trump administration’s goal on this front is far more important than rewriting Dodd-Frank.

Yet so far, we’ve seen mixed signals on corporate tax reform, at least in terms of urgency.

Rumblings out of Washington point to as far away as 2018 for any real progress on corporate tax reform. And that’s not good news for bulls who hope the 2017 rally will continue.

So, is Dodd-Frank reform a good thing, and will it juice up the economy?

Generally, I say yes, but it depends on how the law is amended. It depends whether a rewrite helps banks lend more freely.

If lending does get easier, and banks are able to open up their vaults to borrowers, then that will be good for American business. The same goes for the economy at large, for banking and financial stocks — and, of course, for investors with exposure to these sectors.

The Financial Select Sector SPDR Fund (NYSE:XLF) rose $0.05 (+0.21%) in premarket trading Tuesday. Year-to-date, XLF has gained 1.55%, versus a 2.42% rise in the benchmark S&P 500 index during the same period.

XLF currently has an ETF Daily News SMART Grade of A (Strong Buy), and is ranked #1 of 38 ETFs in the Financial Equities ETFs category.


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