General Overview of the Current State of Financial Industry

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When analyzing the financial industry, it was prudent to start with macroeconomic conditions. The trade war, rising interest rates, banking regulations, and the overall market outlook are the most important drivers of the financial industry at the moment. As the current administration continues to impose tariffs on China the risk that trade financiers face will continue to rise. It will take a while to understand how the new tariffs will affect the number of shipments and ultimately the revenue of banks’ lending to traders but there is little doubt the revenue will decrease from past performance. The question at this point is by how much will it decrease?

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Changes in interest rates directly affect the financial industry’s bottom line. Interest rates set by the Federal Reserve dictate the rate at which banks can borrow as well as the rates in which banks can lend. These interest rate changes can have mixed results. On current loans that the bank holds and all cash that the banks have available to lend interest rate spread will widen which brings greater profit to the banks. On future loans while the interest rate spread will return to normal levels, the number of loans is likely to decrease as corporations and retail consumers cost of capital rises. It is also fair to note that most analyst have predicted interest rate hikes since the beginning of the year, therefore these changes may already be priced into the market. The current administration began repealing banking regulations since its inception.

Repeal of Dodd-Frank in May 2018 is relatively new, and the effect of these repeals will continue to be seen for the next several quarters. Also, the Trump administration has reduced the corporate tax rate which will continue to encourage spending and investment. Securities in the financial industry were selected in three areas banks, financial processing, and data companies and insurance. The strategy was to diversify further by selecting companies that had different underlying drivers in subsectors of the financial industry. All of the stocks selected were evaluated by comparing the current P/E ratio with the average P/E for the last 5 years and reviewing analyst reports. All securities selected had below average P/E ratios and were given buy ratings by several analyst. The $100,000 was split evenly into Synchrony Financial (SYF), First Data Corporation Class A (FDC), Lexinfintech Holdings Ltd (LX), JP Morgan Chase & Co (JPM), and Berkshire Hathaway Inc. Class B (BRK.B).

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