If Obama is releected, we think he’ll throw down the gauntlet on taxes from a dividends, capital gains and high earners standpoint. This puts high-yield stocks at risk. We went back and look at the original Bush Tax Cuts Round 2, which were signed into law on May 28, 2003. Utilities had the best performance then and outperformed the market by about 9% in the three week period leading up to the cuts. After that, it gave those gains back; buy the rumor, sell the news.
Utilities were the market's go-to sector to trade the news of lower dividend tax rates. The question for financials is did the market differentiate between high and low yielding stocks within the sector in anticipation of the news? The answer appears to be yes.
Essentially, the market does care about taxes. Banks with less than $750m in market cap offering any decent yield are at risk if Obama is reelected. NYB, VLY, PBCT, BOH, NWBI are names we think are vulnerable.