Good Old Days

Ralph 2016-11.jpg

by Ralph Cole, CFA
Executive Vice President of Research

Week in Review

It was an eventful week in Washington and on Wall Street. Republicans appeared to be moving along on the tax bill, but a hiccup occurred Thursday evening that has delayed voting until sometime next week. Strong economic data and hopes for a corporate tax cut led the S&P higher by 1.6 percent this week. The U.S. 10-year Treasury also moved higher this week by 4 basis points, ending the week yielding 2.36 percent.

Good old days

The United States has experienced one of the slowest economic expansions of past 50 years.  This was to be expected after a full blown financial crisis. It has taken years to rebuild our financial system, and it has taken that long for confidence to return en masse. This week, November consumer confidence rose to its highest level in 17 years. At no time during the previous economic expansion did consumer confidence reach this level.

Source: Factset

Source: Factset

The unemployment rate is down to 4.1 percent, inspiring the consumer confidence noted above. Perhaps more importantly, wage growth is starting to percolate, leading individuals to feel better about their financial situation. These are the good old days.

Banks benefiting from higher rates

With renewed expectations for accelerating global growth in 2018, bond yields have started to rise again. A big beneficiary of higher interest rates are banks. Higher interest rates increase their ability to charge more for loans that they are making to customers. Another factor in the rally for bank stocks are the proposed tax cuts. Morgan Stanley calculated this week that if the corporate tax rate was lowered to 20 percent, the median bank in their coverage universe would see a 20 percent increase in earnings next year. Regional banks were up over 5 percent on this news for the week.

Takeaways from the Week

  • The consumer is feeling better about their economic situation now more than any other time in the past 17 years
  • Bank stocks would be a primary beneficiary of faster growth and lower taxes

Disclosures