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After hysteria, calm returns to U.S. financials Add to ...

For all the shock and alarm expressed by U.S. financial stocks on Wednesday in response to the presidential election results, a sense of calm has returned just as quickly. Bank of America Corp. sank more than 7 per cent yesterday, marking its biggest one-day decline in over a year. The shares rebounded on Thursday, and were last spotted up 2.4 per cent in afternoon trading.

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Despite the volatility, U.S. financials have actually been doing well this year, reflecting modest gains in employment and an improved housing market. Financials within the S&P 500 are up 19.3 per cent in 2012, for the best performance among the 10 subindexes within the benchmark index. By comparison, the S&P 500 is up just 10 per cent this year.

Indeed, Thursday’s rebound makes more sense than Wednesday’s hysterical selloff. Investors appeared to be taken aback by Barack Obama’s re-election, even though the Democratic victory was hardly a surprise. By many indications – Intrade, Nate Silver – it was expected.

Still, the reason bank investors might have been disappointed with Mr. Obama’s re-election is the prospect of tighter regulations, in the form of the Dodd-Frank law – designed to head off another financial crisis. The Republican candidate Mitt Romney had campaigned against tighter regulations and had received overwhelming support from Wall Street.

This, too, is a little odd, given that loose financial regulations are what decimated the financial sector in 2008, killing off Lehman Brothers and making bailouts necessary. Under loose regulations, financials within the S&P 500 fell 66 per cent from 2007 to the end of 2008.

Since Mr. Obama entered the White House at the start of 2009 and tightened regulations, financials have risen 22 per cent – and they are up 157 per cent from their lows in March 2009. Heading off a financial catastrophe is no doubt behind these gains, but it is hard to see why increased regulations have held them back.

The Washington Post even suggests that Mr. Obama’s re-election could remove uncertainty hanging over the sector.

“Now that the election is over, there will be a clearer path to resolutions of regulations that have been caught up in inter-agency disputes,” said Karen Shaw Petrou, managing partner of Federal Financial Analytics. She gave the example of the Volcker Rule, a provision of Dodd-Frank aimed at restricting banks from making risky investments with their own money. “Finalizing the basic framework of Volcker is in the industry’s favour because it eliminates the uncertainty that’s casting a pall over a lot of strategic planning,” Shaw Petrou said.

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