What Is The 2026 Policy Agenda?

Speaker 1:
Welcome to TD Cowen Insights, a space that brings leading thinkers together to share insights and ideas shaping the world around us. Join us as we converse with the top minds who are influencing our global sectors.
Jaret Seiberg:
Welcome to Two Cents, the financials podcast at TD Cowen. I am Jaret Seiberg, managing director and financial services policy analyst at TD Cowen Washington Research Group. We are going to do a special version of our podcast today to preview 2026 on the policy front. This coincides with the publication of our annual note, known as The Big List, which looks at the more than 125 issues in the policy space that we're following that pertain to financials, crypto, and housing. Back with me, as always, is my partner in crime, Scott Smith, who is TD Cowen specialty salesperson for financials. He's going to give us an update on where the market stands, and then we're going to talk about the policy environment. First, though, I did want to catch up on the news, as always, and this is going to be a very 2026-focused news recap, because the president has been pretty active already in the new year.
We saw him turn to his populist leanings with an announcement that he is going to prevent institutional investors from buying additional single family homes. This likely is going to be tied to other initiatives on the affordability agenda, particularly focused on housing, including expanded access without penalties to 529 and 401(k) plans in order to make down payments to pay for mortgages. I think that all of this is really focused on the demand side of the equation, it likely produces a short-term boost in the housing market, but I do worry that, over the long term, absent an increase of supply, that this is just going to reaccelerate home price appreciation and further worsen the housing affordability crisis. The one other development that we have is a lot of interest in what the bank regulators are going to be doing. We had House Financial Services Chairman French Hill release a legislative package to provide deregulation to the smaller banks.
I do think that package is going to pass the House, but probably will have a hard time being enacted. To me, what we really need to watch are the bank regulators, and we should get more news out of them in the coming weeks as it relates to bank capital requirements, as well as regulatory scrutiny thresholds. All right. With the news segment of our podcast out of the way, let's bring Scott back. Scott, what are we seeing out of the market in the first couple of weeks of the new year?
Scott Smith:
Well, Jaret, thank you so much. I have to say that it's really hard to have a conversation about financials year to date without using superlatives, and it is absolutely true that, over the first couple of days, there were some tongue-in-cheek comments from investors about whether we've seen an entire year's worth of performance in just a couple of days. It certainly has struck me that your 413 policy notes in 2025 may actually easily be eclipsed in 2026. As you pointed out, the president seems poised to really embrace his populous tendencies in 2026 as he's looking to attack the affordability issue ahead of the midterm elections. Elections, I think, investors believe he is quite worried about after last year's elections. That doesn't even include the questions about Venezuela, the seizing of an oil tanker, the Atlantic, and things like the resurgence of the Greenland conversation.
All of that, in particular, the commentary that you talked about with respect to the ban on large institutions owning single-family homes have impacted, but only really briefly, the alternative asset managers, and that was really just over the course of yesterday. Marcus do seem to have digested that news, and while the most impacted names remain below the year-to-date highs, they are up small in the intervening time period, so it does feel like people have gotten their hands around that. It is worth noting that banks are squarely in charge with KRE, regional banks up over 5% year to date in this early stage of the game, and bank BKX is up almost 5% at 4.8%. It's interesting, because TD Trader Jim Everett has been pointing out for some time that we had been consistently been at all-time wides between XLF and KRE, so the recent, and in "Recent," I really mean just in the last day or so, performance of regionals relative to BKX.
In other words, outperforming them slightly is a notable change. In terms of overall GICS level-two sectors, banks are in third place at this very early stage year to date, following energy and discretionary, but it's actually pretty close. Within the financials, insurance so far is the lagger down about 70 BIPS a year to date, but that means that there are about 630 BIBS behind KRE. For banks, the curve steepness has been a factor driving the outperformance with three-month, five-year spread standing at 13 basis points versus being negative for many, many years, as you know. But the other factors there are strengthened broader markets, positive credit trends, and the overall deregulatory environment. Net investors are pretty positive as we head into earnings next week, and it feels like that's a constructive outlook for much of the year as we sit here today. Some of that hinges on expectations for the rate cuts, as people believe that we will have a more dovish Fed head, but it is worth pointing out that investor conversations around the Supreme Court decision tomorrow on tariffs is a potential wildcard.
I've definitely had investor dialogue, both on the plus and minus direction in terms of what the Supreme Court could do and what the market reaction to that might be, and that has the opportunity to kind of change the overall dynamic. Although like I said, I think what we're going to see from earnings, as they kick off, is a pretty constructive backdrop.
Jaret Seiberg:
Scott, can you refresh us all on what the earnings schedule looks like in financials? What companies tend to go first and how does it play out?
Scott Smith:
Sure. BlackRock, obviously, is one of the very first ones, but then after that, we roll very quickly into all the large cap banks and brokers. Over the course of next week, we will have heard from Citi, Bank of America, Wells Fargo, Goldman Sachs, Morgan Stanley, JPMorgan. I think I'm not leaving anybody else out, but certainly, all those large names go right away. The general trend, if I'm being honest, and if you look back over a really long period of time, especially if the stocks are up a lot into earnings, has tended to be a little bit of a selloff after the JPMorgan earnings.
People view that as the bellwether, they generally give a pretty constructive update, they set the bar relatively high, but Jamie is, most often than not, effusive in his view, he always sounds slightly cautious, I think, appropriately, and that does have the tendency to take the names down, even if they don't persist to the downside, but it does feel like the setup could repeat what much of the history looks like next week as investors, especially going into what will be a long weekend, the following weekend, just to take a little bit of money off the table and then rebuild positions, as the rest of earnings flow through.
Jaret Seiberg:
Great. Scott, insightful as always. Thank you so much. We're going to transition now into our main segment, which is going to focus on our 2026 policy preview. I do think that we are in the golden age of deregulation for financials, housing, and crypto. If you're a company in this space and you have a policy demand, now is the time to come to Washington to try to get it done. The risk here is the clock, because it takes a lot of time and it's very difficult to change laws and regulations. It's why I view 2026 as critical, as changes have to be underway this year to make sure they're actually implemented before the next presidential inauguration. I know, Scott, you're rolling your eyes at that, we're still three years away from the next presidential election, but really, that's the problem when you only have a one-term president, is that the clock moves really quickly and it can be difficult to get things done.
I have five themes that we're really looking at for 2026. The first is progress on deregulation. You got to give President Trump credit, he has taken control of the financial regulators faster than any other administration in the 35 years that I have been following financial policy. He got complete control almost immediately of the SEC, the CFPB, the FDIC, the OCC, and while it took a little longer at the Federal Reserve, he did get his person in charge of bank regulation at the Fed. That is a process that often can take 18 months, sometimes even two years into an administration, and they pretty much did it in six months. What that means is that this administration is ahead of the curve when it comes to trying to get policies proposed, which means they're going to be early in getting policies implemented. That's critical, because if a policy is still pending by January 20th, 2029, it's much easier for new administration to stop it than if it's already been implemented and financial firms are already complying.
What we're looking for over the next couple of months is progress on bank capital reform, progress on changing supervisory levels at the banking agencies, progress on tokenization of securities at the SEC. Those are some of the most immediate changes that I think we're going to be looking at. The second big theme is sustainability, and I think this often gets overlooked, but in an era where administrations seem to be changing now every four years rather than every eight years and where policy swings seems to be getting more and more wide, sustainability really is critical. And on that front, I think we're seeing the most sustainable proposals coming out of the banking agencies, which is why a lot of the bank names that Scott was talking about a couple of minutes ago I think have a real tailwind from Washington. Where I see less sustainability is the work out of the SEC and the CFPB.
To me, changes that are not bipartisan and have little Democratic buy-in are going to be ripe for quick reversal if a Democrat wins in November of 2028. A couple of risks to be watching among my themes, one is regulatory divergence. We need to see the regulators on the same page, we don't want to see regulatory arbitrage going on. There are some hints that the FDIC and the OCC are moving faster than the Federal Reserve. That could slow down deregulation, so it's something we're watching. We're also watching the reemergence of populism. President Trump was on full display on that front just at the beginning of this year. I expect we're going to see more of that as the president tries to rally different coalitions within his MAGA movement ahead of the midterm elections. And then that brings me to the midterm election itself. Elections really dictate what Capitol Hill does, and I think the midterm election is going to put a lot of pressure on Congress to enact housing policy legislation, particularly bills that could benefit manufactured housing, as well as to provide model zoning reforms that local communities could adopt.
Both of these would be broadly positive in the housing space, although neither would have an immediate impact. With that, I wanted to turn the conversation back over to Scott. I know the note was a lot to digest, but when you're viewing the market and getting a sense of the market's perceptions out there, what do you think the market is focused on?
Scott Smith:
Jaret, clearly, the market is paying attention to issues around things like bank capital, for sure, and then there's a myriad of other issues, right? And I know you talked about a number of them in your note, but I do think there are a lot of questions about what other populist ideas may come up. I think you and I have had the same investor conversation about whether or not the idea of putting some cap on credit card interest rates resurfaces. It was an election conversation. It did seem like, at the time, the administration got the joke that, at some level of very low interest rates, the amount of credit would disappear for a wide swath of the American consumer, and that would not be construed as a positive, obviously, but it remains to be seen whether there's some short-term impact that says, "Wow, I can really immediately impact a lot of people's bills if I were to lower that rate at some level."
That's clearly a focal point. We obviously continue to have a lot of conversations about what may or may not happen with Fannie and Freddie, and then some of the other issues that popped up, people certainly paying attention to the issue in Colorado around the minimum level of... Oh, my God, I'm going to draw a blank on it.
Jaret Seiberg:
You're talking about the interest rate cap.
Scott Smith:
Correct.
Jaret Seiberg:
Colorado is trying to opt out of a federal law that allows state banks, and not just national banks, to export interest rates, which means that what matters is the interest rate cap in your home state, and it doesn't matter where the consumer is located. By opting out, Colorado's effectively preventing state-chartered banks outside of Colorado from being able to charge their home state's interest rate. That's seen as an attack on fintechs that partner with state chartered banks to take advantage of that interest rate export capability. I do think it's going to end up at the Supreme Court. To me, if Colorado prevails, you're going to see copycat legislation and a lot of more progressive Democratic-leading states, and so this is certainly a risk for the fintechs that is worth watching.
Scott Smith:
Also, obviously, a lot of attention being paid around the entire crypto space, including stablecoin and the ultimate decision about whether or not stablecoins could pay interest, and how that would play out and the broader impact. I do think one thing that was really helpful in your note was the color-coding of the issues. And I think, as this year progresses, we're going to end up spending a lot of time with investors thinking about what issues could get addressed in a way that becomes permanent or semi-permanent, and then how you have to think about that versus the issues that may or may not get put through, but then would actually immediately get reversed on some electoral change. That's also going to be in focus for particularly investors with a little bit of longer-term horizon, because you really can't get too far offsides one way or the other if rules are going to be temporary versus permanent.
Jaret Seiberg:
Yeah. I think it's a huge challenge. If you're running a company and some compliance regime that you disliked and was very costly, and suddenly it's gone, do you dismantle all your investment that you've made to comply with it or do you keep complying until you're really confident that the change is permanent? I think that is a conversation that a lot of boards and a lot of management teams are going to have to be having over the next 12 to 24 months as we see changes coming out of these agencies. I did want to wrap up this segment by just going through the broad sector topics within the note. The note looks at banks and, as I said, I think it's the best policy environment for them, and we're really focused on capital relief. On fintech and consumer finance, the issue here is the CFPB.
The Trump administration may succeed in shuttering the agency, but you still will be liable in the future for missteps that occur today. On the payments front, this is really about debit and credit interchange, with our primary focus on debit interchange and how the courts may invalidate the Durbin Debit Interchange bill in a way that's negative for the issuers and networks and positive for the merchants. For markets, it's really about tokenization of equities and the future of the national market structure rule. On crypto, we're focused on legislation, particularly the Clarity Act, and what type of exemptive relief could come out of the SEC. That should be a big positive. Insurance is mostly a state-regulated issue, so we don't focus too heavily on it, but there is a newfound interest in Congress, given the rising cost of property insurance, which is making housing even more unaffordable.
I don't think there's much that can be done, but there's a number of bills pending, so that also will be something getting attention. On the student lending front, last year was about reform, this year is about getting much more aggressive on the collection side. For housing, I think this has moved to the top of the list of policy priorities, but every initiative we're seeing is focused on the demand side. What we are looking for, if there is a new reconciliation package, would be tax credits to boost the construction of entry-level workforce housing. And then, on China, this is all about the ability of Chinese companies to list on US exchanges with the SEC pursuing several rules that could restrict those listings. Those are all the major sectors that we look at and some of our broad views on that front. Scott, as we think about this full policy agenda, what's your overall takeaway about midterm election risk? Are investors looking at this yet?
Scott Smith:
I think they absolutely are. I think the election results from last year, potentially most notably here in New York with Mamdani, really got the president very focused around what the midterm elections are going to look like. And I think he's held a Republican offsite, it seems like he's deeply embraced his populist side in an effort to address where there's clearly a pressure point, which is a point of affordability. It's obviously the big bugaboo word of late last year and probably all of this year. I think everyone is on a little bit of a nice edge about what will happen in an attempt to keep that affordability conversation, at least in some way, favorable to the current administration. Otherwise, I think people are very worried that you have a pretty significant shift. And weirdly, Jaret, you've got a lot more history here than I do, but it feels like, generally, markets like gridlock.
And to the extent that the midterms go in a direction that produces some gridlock, normally, I would have thought that would be constructive. This time around, it feels like it might not be.
Jaret Seiberg:
Yeah. I think what's adding to the angst is uncertainty about where the president actually stands on some of these issues. While he's put highly qualified regulators in place and they strongly believe in deregulation, the president has been known to suddenly change position. We saw that with some of his more populous announcements lately, so I think that it's less clear whether a Republican Congress means that you get more grid luck with the president or if having Maxine Waters and Elizabeth Warren chairing the two financial services committees means that you get more gridlock. And I think that's adding to some of the confusion here. Scott, I want to thank you for coming on as always, and I do want to wrap up like we do every episode, with our preview of the month ahead. And I really just want to focus on monetary policy in the Federal Reserve here, because I think the second half of January is really going to be all about what happens with the Federal Reserve.
On January 21st, the Supreme Court holds the argument on whether the president has the right to fire Federal Reserve Governor Lisa Cook. We probably won't get a decision for a couple of months, but that argument is certainly likely to get the market's attention. We then, just a few days later, have a House Financial Services hearing looking at monetary policy, then we get the FOMC press conference on January 28th after the conclusion of the FOMC meeting. And if that's not enough, Secretary Bessent has told us that the president is likely to name his Federal Reserve pick by the end of the month. Color me skeptical on that. I think it's more likely in March, but certainly, Bessent has put that on the table. I think, while we may be focused on a lot of these policy issues in the first half of the month, I do think we're going to be looking more at monetary policy for the last week or two of January. With that said, I'd like to thank Scott for coming on. Thank you, everybody, for tuning into our podcast and please look for our next episode in February.
Speaker 1:
Thanks for joining us. Stay tuned for the next episode of TD Cowen Insights.