By: Jeff Pollock
March 31, 2017

At the end of September, about a month before last fall’s Presidential Election, we wrote that “if Trump’s recent momentum in the polls continues … and Republican candidates running for the Senate benefit too, the same party will occupy the White House and Congress, surely easing today’s gridlock.”

So much for that idea.

Last Friday, the Trump administration suffered an embarrassing setback to its policy agenda. Following the Freedom Caucus’ lack of support to repeal and replace Obamacare, the healthcare reform bill was pulled from the floor of the House of Representatives and not even voted upon.

Since the election, the S&P 500 has appreciated by almost 11%. Much of those gains have been fuelled on the assumption that Trump will deregulate banks by repealing Dodd-Frank and spur economic growth with a tax-cutting fiscal stimulus package.

Unable to attain the majority of the House’s support last week (which is 55% Republican), Trump may now require Democratic support to push his subsequent agenda through Congress.

While there are 237 Republicans in the House – 44 more than the Democrats – the GOP is divided into three separate factions. 48 comprise the moderate “Tuesday Group”, 33 belong to the now infamous Freedom Caucus, and the remaining 156 are mainstream party Republicans. To pass a bill and advance it to the Senate, a simple majority of 218 votes is needed.

If healthcare reform proved too contentious, repealing Dodd-Frank will be just as difficult. After all, populists in Washington have negatively targeted Wall Street and its banks for the past decade. Even if it were repealed in the House, finding the 60 votes in the Senate (Republicans have 52) would be wishful thinking.

At the moment, two US bank stocks trade below their book value – Citigroup and Bank of America. Normally, this is a metric that flags value investors like Vestcap to buy the stock. However, a better entry point possibly lies ahead. While the next item on the White House’s agenda is tax reform, as the discussion to repeal Dodd-Frank draws near, an opportunity will present itself to buy US banks at more attractive valuations given the increased likelihood that deregulation will be easier said than done.

This Blog is made available for general information purposes only. The information provided is believed to be reliable and accurate at the time it is posted. However, Vestcap Investment Management Inc. does not guarantee that the information is accurate, complete, or current at all times. The information is not intended to constitute financial, accounting, legal, insurance or tax advice and, should not be relied upon in that regard. You should consult with a professional prior to acting on any information.