Bank stocks have been among the biggest beneficiaries since Donald Trump’s election, buoyed by the President-elect’s promises to improve the economy. Mere hours before his inauguration, however, it appears bank stocks are getting cold feet.
On Tuesday, the Financial Select Sector SPDR ETF (XLF), an exchange-traded fund that acts as a measuring stick for financial stocks since its top holdings include big banks JPMorgan Chase (JPM), Wells Fargo (WFC), Bank of America (BAC) and Citigroup (C), tumbled 2.4%, its steepest one-day decline since June. You could say a correction was inevitable after bank stocks advanced 22% in the month that followed Trump’s election. But the timing of the sudden nosedive was a bit suspicious.
Financials stabilized on Wednesday, as the XLF remained relatively flat. And they’ll likely remain in a holding pattern today too, on the eve of Inauguration Day. But it’s possible bank-stock investors got spooked by the reality of a Trump Presidency in light of recent events.
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A monthly Bank of America Merrill Lynch survey of fund managers found that concerns about Trump’s economic policies are on the rise, particularly his trade policies. About a quarter of the 215 fund managers surveyed said they were also worried about U.S. policy errors in a Trump administration. Collectively, those fund managers hold $547 billion in assets—meaning they hold quite a bit of sway on Wall Street. And because of their escalating Trump-related concerns, more of them are holding onto that cash and taking a wait-and-see approach with Trump.
Of course, Trump wasn’t the fund managers’ only concern. Swelling yields on the 10-Year U.S. Treasury bond was another red flag; the current yield is 2.4%, up from 1.6% as recently as September. Higher bond yields can sometimes trigger a collapse in stock prices. For instance, the last time 10-Year Treasury yields edged above 4% was right before the global recession.
What’s odd about the retreat in bank stocks is that it comes on the heels of a very good round of fourth-quarter earnings results for financials. JPMorgan Chase, Bank of America, Citigroup, Goldman Sachs (GS) and Morgan Stanley (MS) all beat consensus earnings estimates in the past week, though Wells Fargo fell short. But, because most of those bank stocks gained at least 20% following the election, the earnings beats didn’t add to the advance. Now financials are retreating.
The reality is a one-day retreat is nothing to get too worked up about, even if it was fairly steep. Corrections can be healthy after a big rally, and bank stocks were due for a pullback. If they continue to fall after Trump takes office, then that might signal more of a negative trend than a natural pullback.
In the meantime, pay close attention to how Trump’s words (or, in most cases, Trump Tweets) affect financials, at least if you own any bank stocks. Trump has shown an ability to move stocks, sectors and even currencies (see his bashing of the U.S. dollar this week) simply by talking about them. And he’s not even the President yet. Once Trump’s words become policies, who knows how markets will respond?
I wouldn’t go selling off your financial stocks yet just because of one bad day. But it’s worth monitoring them closely with big change coming to the White House—and, potentially, on Wall Street.
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