As you approach your portfolio heading into 2017, the most important thing you can remember is that the election of Donald Trump changed everything. It changed policy expectations, growth expectations, inflation expectations and more, and the ramifications of those changing expectations are just starting to play themselves out in the U.S. stock market.
With that in mind, we expect Zions Bancorp (NASDAQ:ZION) to be one of the top-performing stocks in 2017.
ZION is uniquely situated to take advantage of a growing number of the potential changes that may be coming in the U.S. economy and stock market next year. 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.
ZION Stock Tailwinds: Scaling Back, or Repealing, Dodd-Frank
While the Dodd-Frank Act was considered by many to be a huge win for consumers, it was received with much less enthusiasm by bank executives and investors.
The act not only saddled financial institutions with additional layers of restrictions and red tape that required hiring teams of attorneys and compliance professionals to sort through but also — via the Volcker Rule — prohibited financial institutions from engaging in proprietary trading. The implementation of the act impacted ZION’s ability to generate revenue by trading through its own proprietary trading desk and its ability to raise additional capital to keep up with loan demand by creating collateralized debt obligations (CDOs) containing trust preferred securities (TrPS).
The scaling back, or repeal, of the Dodd-Frank Act would boost ZION’s revenue-generating potential by enabling the bank to trade more freely and issue more loans. It should also reduce expenses for the bank as compliance costs fall.
ZION Stock Tailwinds: Boosting Inflation Expectations
President-elect Trump’s economic policies have been getting a lot of attention for their potential to boost inflation here in the United States.
Much of the increase in inflation expectations stems from the increased economic growth analysts are hoping for, but some of it stems from concerns over the trade battles the administration may engage in. Restructuring trade agreements and/or imposing tariffs on foreign-produced goods (especially those from China) would push prices higher in the United States. If this happens at the same time oil prices start to rise, inflation is likely to grow faster in 2017 than it has for nearly a decade.
Rising inflation expectations have pushed bond yields higher to compensate bond investors for the increased inflation risks they are facing. This has led to a steeper yield curve, which is a boon for banks.
The steeper the yield curve is, the greater a bank’s net interest margin is going to be because it can borrow money from depositors at a lower interest rate by paying short-term rates on its checking accounts, savings accounts and certificates of deposit (CDs). It can then lend money to borrowers at a higher interest rate by charging long-term rates on commercial loans, business loans and residential mortgages.
A steep yield curve is a great revenue enhancer.
ZION Stock Tailwinds: Relaxing Environmental Regulations while OPEC Caps Production
President-elect Trump has said he plans to relax environmental regulations for energy producers, which includes opening up previously unavailable areas for oil exploration. The ability to expand exploration into oil-rich areas that have previously been off limits at a time when oil prices are rising because OPEC member nations and other are agreeing to self-imposed production caps has been music not only to the ears of energy producers but also to the ears of the financial institutions that lend money to those energy producers.
The more money energy producers make, the less likely they are to default on their loans.
Since the plunge in oil prices began in 2014, ZION has had to steadily increase its loan loss provisions to compensate for the number of charge-offs in the energy sector the bank has had to take against bad loans. That trend is expected to reverse course as oil prices rise, enabling banks to realize more of their gains.
ZION Stock Tailwinds: Lowering Corporate Taxes
The Trump transition team has said President-elect Trump plans to cut corporate taxes in the United States. Investors love the idea of lower corporate taxes because the lower corporate taxes are, the more money companies have to return to their shareholders.
ZION has shown in the past that it is more than willing to send cash back to shareholders in the form of increased dividends and share buyback programs. Both of these actions have had a positive impact on the stock in the past, and we expect them to have a further positive impact on the stock in the future if the company decides to channel its corporate tax savings in the same direction.
Each of the four fundamental factors we’ve discussed above has to potential to lift ZION to new multiyear highs on its own. When you combine all four, we get even more excited.
Even though the stock has already surged higher — breaking above resistance at $32 — in the aftermath of the Presidential election in the U.S., we anticipate ZION will continue climbing back up toward longer-term resistance at $55 during 2017.
InvestorPlace advisors John Jagerson and S. Wade Hansen, both Chartered Market Technician (CMT) designees, are co-founders of LearningMarkets.com, as well as the co-editors of SlingShot Trader, a trading service designed to help you make options profits by trading the news. Get in on the next trade and get 1 free month today by clicking here.