Banks are earning more money in large part due to rising interest rates. How long this will continue and how they will be affected will depend on how deep the recession will be. It is a wonder that many analysts believed at the beginning of the year that a recession is not in their scope. Some even chuckled at the thought of a possible recession. Now, there seems to be a wide-spread belief that a recession is inevitable. On a positive note, a recession looks to be mild. Per Moynihan, CEO of Bank of America, “Credit quality remains strong”. . .“Delinquencies are low” and he predicts a “shallow economy.”
Also giving the market an extra boost today, changes to UK tax policies that were announced just 3 weeks ago had been reversed. This includes scrapping the cuts to dividend tax rates. The rates proposed to cut 8.75% to 7.75% will remain at 8.75%. Income tax will remain at 20% instead of the 19% that was proposed. And, VAT shopping for non UK visitors will be reintroduced. Similar to what the US is dealing with, the reversal is meant to fight off the risk of recession and the growing inflation problem in the UK.
While these moves coupled with bank earnings were positive for stocks, the Fed is still raising rates, covid still haunting us, and there are a lot of current geopolitical risks. In other words, we are not totally out of the woods. Should still be a bumpy ride going into a recession. I'll be keeping an eye out for other company earnings announcements - if any are as good as Bank of America and Bank of NY Mellon, I am definitely going to add a bit more risk to increase returns. Despite the temptation to act more aggressively, I have to stick to my rules.
