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Why Bank Stocks Have Hit a Wall

Bank stocks were among the biggest beneficiaries of Donald Trump’s election. Now financials are backtracking - and Trump is partly responsible.

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Savings Concept - Pink ceramic piggy bank sat on a loaded mouse trap

Anthia Cumming

When Donald Trump got elected, bank stocks were an immediate beneficiary.

From early November to March 1, the Financial Select Sector SPDR ETF (XLF), whose holdings include all six of the biggest U.S. banks, soared more than 26%, topping 25 for the first time in more than five years. Last week, the bank ETF closed below 23 for the first time since Trump took office despite a couple of strong first-quarter earnings reports from the big banks. Bank stocks have now fallen more than 9% in the last six weeks, at a time when the S&P 500 has dipped only 2.8%.

After a huge post-election run-up, bank stocks have been on steady decline since the beginning of March.

Does it mean the Trump-fueled rally in financial stocks is over? Not necessarily. For starters, JP Morgan Chase (JPM) and Citigroup (C) both handily beat earnings last Thursday, each growing EPS year over year. Though many banks have yet to report first-quarter results, of the six largest U.S. financial institutions, only scandal-embroiled Wells Fargo (WFC) has failed to grow sales and earnings in each of the last two quarters.

So growth among bank stocks hasn’t slowed. And with the notable exception of Wells Fargo, banks haven’t gotten a ton of bad press lately. What, then, is the cause of this six-week nosedive in financials?

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It seems to be two-fold: one, after a 26% run-up in less than four months, bank stocks were due for a correction of some sort, particularly with the market as a whole pulling back; and two, Trump’s bank-friendly promises such as deregulation and tax reform have yet to be pushed through. Those policies were the primary thing that drove financials after Trump was elected. And with nothing concrete being put forth in Trump’s “first 100 days,” the excitement has dwindled, at least for now.

That could change quickly once Trump turns his attention to the banks again. Of course, what could really send bank stocks on a downward spiral is if Congress rejects Trump’s deregulation and/or tax refund policies the same way it voted down the ObamaCare repeal last month. In fact, that repeal is another reason why financials have slumped, creating new doubts about the new president’s ability to get his agenda pushed through even in a Republican Congress.

So, in the short term, the fate of bank stocks may be tethered to Trump and his policies, at least to a degree. In the long term, if U.S. banks continue to improve their top and bottom lines the way they have in recent quarters, then bank stocks should be fine.

What the recent pullback in financials has done is make bank stocks even more attractive value investing targets. Each of the six biggest banks currently trades with a forward P/E of between 9 and 11, which is pretty cheap for growing companies. If you’re looking for value stocks, financials may be a good place to uncover a few bargains right now.

But that doesn’t mean there won’t be more short-term pain ahead for the banks.

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Chris Preston is Cabot Wealth Network’s Vice President of Content and Chief Analyst of Cabot Stock of the Week.