Shares of the country’s biggest banks led the rally seen across sectors on Monday as investor hopes of a deal between the Republicans and Democrats before the fiscal cliff kicks in were kindled by House Speaker John Boehner’s proposal to increase tax rates. This was the first time tax hikes featured in the U.S. budget debate and is seen as a positive first step towards finding a middle ground between the two parties before existing laws for automatic tax increases and government spending cuts come into play starting January.
Investors also seem to have paid special heed to the advice of Dick Bove and Meredith Whitney – both of whom predicted a strong outlook for the financial sector in the near future. That would explain the fact that shares of Citigroup (NYSE:C) and Bank of America (NYSE:BAC) gained about 4% each over trading, followed by an increase of about 3.5% in the share prices of Wells Fargo (NYSE:WFC) and Goldman Sachs (NYSE:GS). The KBW Bank Index jumped up 2.8% over the day.
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Both parties have been haggling over the budget debate for quite some time now, but the contentious issue of taxes was raised for the first time by Republicans only this Monday by Speaker Boehner. As the impending fiscal cliff essentially stems from the expiration of various tax cuts currently in place combined with stricter government spending restrictions, it is imperative for both parties to come to an agreement on how to handle the problem of taxes to keep the possibility of a recession at bay.
This is why Boehner’s proposal to tax high-income individuals sparked so much interest from investors who finally see the talks moving towards a solution.
Investors also welcomed well-known analyst Richard Bove’s view that banks will likely report record earnings this quarter and will have a ‘solid’ 2013.  The view was only strengthened by reports that Meredith Whitney – known for her early forecast of the economic downturn of 2008 – believes that the Fed will likely find the big banks strongly capitalized as part of its stress tests next March. 
This should help the banks raise their dividend payouts in the near future – something already hinted at by the top brass at Morgan Stanley (NYSE:MS) and State Street (NYSE:BK). (see Morgan Stanley Shareholders Likely To Earn Rich Dividends Soon and State Street Is Angling For Fed Approval On Higher Shareholder Payouts)Notes: