After a superb 2017, brokerage stocks should continue to roll next year

With the broad market rising throughout 2017, stocks of brokerage firms shined. The iShares U.S. broker-dealers and securities exchanges ETF posted an increase of 26% for the year through trading Friday morning, while the S&P 500 index was up 18.1% over the same period. Top performing broker-dealers included LPL Financial Holdings, the nation's largest independent broker-dealer, with its share price up 60.4% for the year as of late Friday morning. Ameriprise Financial Inc., which also has large insurance and asset management businesses along with retail brokerage and wealth management, saw its share price increase 52.7% over the same period of time. Wall Street started the year with the expectation of a pullback in securities regulation, as well as a tax cut, by the Trump administration, launching a rally in brokerage stocks. As 2018 approaches, the financial service sector, including brokerage stocks, is poised to continue to outperform, said James Paulsen, chief investment strategist with The Leuthold Group. Mr. Paulsen said 2018 could be a more difficult year for the stock market. He said there could be a correction and stocks could end the year in negative territory. "Generally, that's not great for securities firms. But the flip side is that financial stocks in general are the sector that benefits the most from rising bond yields in this recovery, by quite a wide margin," he said. "One of the delineating factors is interest rates. Short term rates have already gone up, four times in the past 12 months. And long-term rates have seen a move up recently. In 2018, maybe the 10-year Treasury bond breaks 3%. Financials do the best when rates rise." The share prices of broker-dealers climbed throughout the year. Raymond James Financial Inc. and Morgan Stanley shares were up, respectively, 29.6% and 21.8% through Friday morning. Ladenburg Thalmann Financial Services shares increased 28.4% over the same period, while Stifel Financial Corp.'s were up 21%. And the share price of Oppenheimer Holdings, which struggled earlier in the year, increased 47.7%. Financial and brokerage stocks have two things going for them next year, Mr. Paulsen said. "One is the upward interest rate rising environment, from record lows, and the other is the continued backing away from regulatory overreach or heavy handedness," he said. "The economy overall is going to stay fairly good. I'm more worried about inflation, and that's why interest rates would go up. And that's good for the financials."