Bank stocks are on pace for their best week of 2017, as the group rises by nearly 5 percent to turn from negative to positive on the year.
The strong performance is due in large part to investors pricing in efforts across the Trump administration to kill the Dodd-Frank Wall Street Reform and Consumer Protection Act, said Chantico Global CEO Gina Sanchez. Republicans in the U.S. House of Representatives voted Thursday to replace the 2010 legislation, enacted under President Barack Obama, which more stringently regulated the financial services industry.
If the bill were to pass the Senate and become law, which to be sure many see as a very low-likelihood event, “you would see compliance costs for banks cut in half. It would benefit the large banks, as well as the small banks. So I think this would be considered a benefit, certainly for banks, and that has been a big component,” of the bank stocks’ strong performance, Sanchez said Thursday on CNBC’s “Power Lunch.”
Investors are likely pricing in the perceived positive impact a repeal of the Dodd-Frank Act would have on the banks, “and what that means for bank earnings” after the financials fell from one of the best-performing sectors of the year to one of the worst performers. The KBE bank ETF is now barely positive on the year.
“Banks have been under pressure, because we’ve seen a bear flattening of the yield curve for several months now,” she added, referring to the spread between bonds of different maturities narrowing as shorter-term yields rise and longer-term yields slip.
The potential repeal of Dodd-Frank is certainly working in favor of the bank stocks, and Thursday’s testimony from former FBI Director James Comey did little to rattle stocks, pointed out Bill Baruch, senior market strategist at iiTrader. Some technical aspects surrounding the KBE are also showing strength, he said.
“We’ve had a double bottom from the middle of April lows, just recently here over the past week,” Baruch said Thursday on CNBC’s “Power Lunch.”
The fund has also broken meaningfully above the $42 mark, where it’s traded over the last month, and could see another leg higher from here.
“On top of that, with the Fed meeting next week, I think once we get past this kind of gantlet of activity here at the end of the week, I think the Treasury yields will bump up into the Fed meeting. That should be supportive to banks next week as well,” he said.