Not only a record breaking Dow, the US financial sector has also been fueled by President-elect Donald Trump’s promises on proposed stimulation on infrastructure and favorable tax reform. The NYSE financial sector is up about 10% from its low since November 4. Sure, the 100% probability of a December rate hike, as suggested by the fed funds futures contract, might help too. Another variable that plays a part of the growth of the sector is one of Mr. Trump’s campaign promise on eviscerating parts of the Dodd-Frank. The Dodd-Frank Wall Street Reform and Consumer Protection Act was the principal regulatory response to the financial crisis and Mr. Trump had called the stringent regulation unnecessary in his campaign (The Dodd-Frank was created to help provide increased transparency derivative using CCP and to prevent future bailouts of financial firms). The conservation buffer increased the Tier 1 capital by 2.5% for all banks and needless to say, depending on which part of the act Mr. Trump’s administration is working to strip, the banks’ leverage ratio and profitability will have a significant boost. According to Factset’s earnings report on November 18, the Financial (3.6%) sector reported the largest upside aggregate difference between actual sales and estimated sales and recorded upside earnings surprise (8% from 0.2%). The interest rate hike scenario is already crystallizing. The Fed’s vice chairman position to oversee Wall Street will likely be the second most watched variable on banks’ profitability.
Assuming the recent market rally is priced from the future marginal net rate discounting, we are putting more weights on the leverage and growth factors under the multi-factor model.
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