Tighter bank rules could lead to leaner profits

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Many analysts and investors including myself have been wondering what the catalyst would be to take this market to the next level. If this past week is any indication, perhaps the banking sector is the answer.

This past week, the U.S. Federal Reserve reported the results of their most recent stress tests. They applied a very stressful economic situation (a 13% unemployment rate and a decline in the stock market of 50%) to the largest 19 banks in the country to see if they were able to handle this difficult environment. Fifteen out of the 19 banks were able to pass the test proving the U.S. banking system was strong enough to weather even the most dire conditions and survive.

Many of the banks, once passing the “stress” tests were then able to raise their dividends and even buy back their company’s stock to show investors that not only are they still in business, but they are thriving.

I have said many times that I do not understand how or why the U.S. government, in my opinion, continues to hurt the banks with their most recent policies and regulations. U.S. banks are finding it a lot more difficult today to make the profits they once did due to these new rules the U.S. government wants to put through. I believe that if banks are not allowed to grow and turn a profit, they will bring down the whole market.

I do not believe the stock market can move significantly higher without the participation of the banks. I believe the banks are the lifeline of a country. If things are going well in an economy, the banks will do well. When times are good, the banks provide the loans that small and large businesses require to move forward with their strategic plans. If this money is not available, it can be a large headwind for these businesses.

When you consider the U.S. banking sector, many still have a bad taste in their mouths from the days of 2008. Many in the U.S. have vowed to go after those institutions that brought the United States,  and for the most part the world, to its knees in 2008. These individuals have been quite successful in helping rewrite the rules that pertain to these banks and the way they do business today. However, in my opinion, what these individuals did not realize is the damage they are doing to investors by implementing these changes.

The U.S. banking system makes up a large part of U.S. stock markets. U.S. bank shares are some of the most widely held shares in the United States and around the world. Thus, when the new rules and regulations limit bank profitability, they also have a negative effect on the banks shares prices and in turn affect investor’s portfolios.

The rallies we have seen in the markets over the past few years have come from sectors like tech or energy.  U.S. banks and financial institutions have contributed very little to anything positive over the past few years. I believe that if we could finally get some participation from the U.S. financial sector to this rally, who knows how high this market will go.

If you have any questions regarding the above article or are looking for an Investment Advisor to help you with your portfolio, please visit my website at www.allansmall.com. I will be glad to speak to you.

Allan Small is an Investment Advisor with DWM Securities Inc., a DundeeWealth Inc. Company.

This is not an official publication of DWM Securities Inc. The views expressed are those of the author alone, and are not necessarily those of DWM Securities Inc.



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