You Just Got the Green Light to Start Buying This Sector

If you’ve been waiting to buy financial stocks, you’ve just been given the all-clear by the Fed…

Last week, the U.S. Federal Reserve announced the results of its annual bank “stress test.” And it gave the entire sector a “clean bill of health.”

This is the second round of good news banks have received in the past three months.

Back in March, I told you that the 50 largest hedge funds in America had bought more financials than any other sector. Here’s what I wrote on March 15…

As a whole, the brightest investors in the world own far more financials than any other sector. Seeing funds load up on a sector is a good omen.

The passing grade on the stress test is the second “good omen”…

Now that banks have been given the all-clear by the Fed, they’ll be able to buy back more stock and increase their dividend payouts.

Share repurchases reduce the number of shares outstanding, which raises the market value of the remaining shares.

And those dividend raises will put increased streams of income in your pocket.

Regular readers know I’m bullish on financials. And in a moment, I’ll explain why this news (along with two other trends) will push bank stocks higher.

But first, let me show you why this stress test was so important…

Making the Grade

In the wake of the 2007–09 financial crisis, Congress passed the Dodd-Frank Act. It was signed into law by President Obama in 2010.

The law requires banks to improve their accountability and transparency. Among other things, it also seeks to protect taxpayers by ending bank bailouts.

A major part of the law is an annual stress test for financial institutions with more than $50 billion in assets.

Basically, the stress test measures if banks have enough capital, management controls, and other necessary safeguards to survive various worst-case scenarios.

Last week, the Fed released results of the 2017 stress test. It was the first time that all 34 banks passed.

As I said, that’s bullish for investors.

The last time the Fed gave banks the all-clear was in June 2016. In the two months following the results, financials shot up 9% (see chart below).

We expect to see similar returns this time. Especially with the good omens lining up for banks…

More Good Signs for Banks

As I said above, banks were waiting for the test results. Before they could announce any share buybacks or dividend increases, they needed the Fed to give them the all-clear.

The Fed announced the test results on June 27. A day later:

• JPMorgan announced it would buy back $19.4 billion worth of its stock. And increase its dividend by 12%.

• Bank of America announced it’s buying back $12 billion of its stock.

• Citigroup announced it’s buying back $15.6 billion of its stock. And it’s doubling its dividend.

And those are just the biggest ones.

Almost every bank that passed the stress test announced additional buybacks and dividend increases.

Along with the passing stress test grade and hedge fund buying spree, there are a couple of other tailwinds behind banks I’ve been following:

• Interest rates are going up. And that means banks can increase profits by capturing more on net interest margins.

• President Trump wants to roll back the cumbersome Dodd-Frank regulations, which would accelerate profit growth for banks.

These trends will provide support for banks’ stock prices.

We now have several reasons to buy financials. If you already own financials, continue to hang on. This run is just getting started.

Regards,

Nick Rokke, CFA
Analyst, The Palm Beach Daily

P.S. The easiest way to go long financials is to buy the Financial Select Sector SPDR ETF (XLF).

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