The beginning of 2017 was a time of hope and optimism on Wall Street. The election of President Donald Trump had changed everything from policy expectations and growth expectations to inflation expectations and more, and the ramifications of those changing expectations had just started to play themselves out in the U.S. stock market.
With that in mind, we chose Zions Bancorp (NASDAQ:ZION) to be one of the top-performing stocks in 2017.
We believed ZION was uniquely situated to take advantage of a growing number of the potential changes that were expected to play themselves out in the U.S. economy and stock market this year. We believed the Trump administration could bolster ZION by:
- Scaling back, or fully repealing, the Dodd-Frank Wall Street Reform and Consumer Protection Act;
- Boosting inflation expectations;
- Relaxing environmental regulations for drilling while OPEC caps oil production; and
- Lowering corporate tax rates.
While the Trump administration has been successful in a few of these areas, it has thus far fallen woefully short in others. Let’s take a look.
Scaling Back, or Repealing, Dodd-Frank
We were looking forward to the scaling back, or repeal, of the Dodd-Frank Act and believed it would boost ZION’s revenue-generating potential by enabling the bank to trade more freely and issue more loans by creating collateralized debt obligations (CDOs) containing trust preferred securities (TrPS). We also anticipated a reduction in expenses for the bank as compliance costs fell.
Unfortunately, not much has happened on this front. In fact, Treasury Secretary Steven Mnuchin has even expressed some support for the Volcker Rule — the portion of the Dodd-Frank Act that prohibits financial institutions from engaging in proprietary trading.
It’s still early, but with all of the other legislative priorities stacking up in front of financial regulatory reform, we aren’t as confident this issue is going to be addressed in the near term.
Boosting Inflation Expectations
We, along with most others, expected President Trump’s economic policies to boost inflation here in the United States. Analysts were anticipating increased economic growth, coupled with the potential for trade battles and the implementation of tariffs, would boost inflation. As a result, bond yields would be pushed higher to compensate bond investors for the increased inflation risks they would be facing. This, in turn, would lead to a steeper yield curve, which would be a boon for banks.
Unfortunately, the “reflation” trade that dominated the market through the end of February has faded, and the yield curve is flattening once again. This is a negative for banks and their net interest margin levels.