Trump backers probably don’t want to hear this, but bank stocks will perform better if Hillary Clinton beats Donald Trump in the 2016 presidential election.
True, Trump has promised to dismantle federal regulations. These handcuffs have made it impossible for banks to return to their heydays of growth and profitability.
At the same time, as much as Clinton has been close to Wall Street interests for a long time, the campaign has been calling for more crackdowns on the financial sector. If she keeps her promises, banks can expect additional hurdles to overcome.
Given that dichotomy, one might expect a Donald Trump presidency to be a slam dunk for bank stocks.
More than anything else, investors — especially investors in financial sector securities — crave some kind of certainty. With Clinton, the market can pretty much model in what’s expected to affect shares going forward. Trump’s volatility and unpredictability makes any such assumptions wobbly at best.
It’s also important that Trump has so far shown that he’s not really conversant with critical financial sector levels, such as interest rate policy. He may be surprised to learn that the president has no power over the Federal Funds rate — or that the Federal Reserve adjusts it for nonpolitical purposes.
It also appears that Trump doesn’t understand that interest rate policy is a blunt tool, anyway.
Perhaps most importantly, Clinton’s strong lead in the polls has the market predicting that there will be another Democrat in the White House. Anything that upsets expectations is always bad for equities.
Why Rock the Bank Stocks?
The bottom line is that a Clinton administration is going to look like a continuation of the policies of the last two presidential terms. Banks aren’t thrilled with that, but they’ve learned to live with it. Indeed, they’ve made some heavy investments and changes in order to adjust.
A Trump win would blow all this up. Wall Street banks would love to be freed from the post-financial-crisis regulatory framework — to say nothing of the Consumer Financial Protection Bureau — but not at the cost of unpredictable policy moves.
Besides, Wall Street banks are showing signs of improvement as things are. The nation’s biggest banks had a fine earnings season. A surge of bond trading — long an albatross for the industry — did wonders for results at JPMorgan Chase & Co. (NYSE:JPM), Bank of America Corp (NYSE:BAC), Citigroup Inc (NYSE:C), Goldman Sachs Group Inc (NYSE:GS) and Morgan Stanley (NYSE:MS).
Even scandal-plagued Wells Fargo & Co (NYSE:WFC) — which doesn’t lean heavily on investing banking — managed to match Wall Street estimates.
Besides, bank stocks have been putting up some very impressive gains recently. Using the SPDR KBW Bank (ETF) (NYSEARCA:KBE) and the SPDR KBW Regional Banking (ETF) (NYSEARCA:KRE) as proxies, bank stocks are up over 20% since the market’s late-June selloff.
The S&P 500 is up only 7.5% over the same span. Investors are thinking if it ain’t broke, don’t fix it.
At this point, the market is pricing in a Clinton victory in the 2016 presidential election, and it’s fine with that.
Anything else would be a surprise, and the market does not take kindly to surprises.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.