Banks To Rally As The Fed Accepts Capital Return Plans
The big news on Wednesday afternoon was that the Federal Reserve didn’t have a problem with any of the 34 banks’ capital return plans. You can look at this as a positive or a negative. It’s clearly a positive for the near term because it means dividend and buyback increases for the banks. The XLF financials ETF rallied 1.63% in after hours trading. JP Morgan (JPM) is raising its dividend to $0.56 from $0.50 per quarter and has authorized $19.4 billion in buybacks by June 30th, 2018. Citigroup (C) raised its dividend to $0.32 and has $15.6 billion in buybacks authorized through Q2 2018. The reason this news could be considered a negative for stocks is because it could be a signal that the Fed is serious about normalizing rates and the balance sheet, since it’s relaxing its concerns for the banks. If the Fed has an agenda for hawkishness regardless of what economic data is released, it could lead to a recession sooner than later.
The chart below shows that, while the Fed was worried about the banks offering big dividends to shareholders, the Fed has created one of the most overvalued stock markets ever. The banks only lent money to unqualified buyers during the housing bubble because the government demanded them to because it thought owning a house was part of the ‘American dream.’ The point I’m making is that the banks can decide what’s right without the Fed stepping in.
Instead of Yellen saying she’s concerned with asset valuations, she should have not gone through with the QE policy to create the bubble in the first place. Critics of those who are skeptical of Fed interventionism say that we’re not allowed to express worry about raising rates because we’ve wanted the Fed to raise rates for years. That’s a false equivalency because I disagreed with the past 7 years of policy and am now simply warning about the potential effects of normal policy.
