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The First Election Winner: Bank Stocks

Donald Trump’s unexpected victory ignited an equally unexpected surge in the stock market. Since the date of the election, the S&P 500 Index rose nearly 2% over the next six trading days. That put it back to where it was in early September when most political pollsters thought Hillary Clinton was a shoo-in.

Not only did Trump’s win shake the faith in presidential polls, it didn’t do much for the stock market’s reputation as a leading indicator. You would have expected a major market move—most said a Trump win would cause a correction—given how the two candidates had different economic agendas.

But the market has changed. It’s just the moderate change in the overall index masks a huge shift in values among various sectors within the index, with many more to come.

By a wide margin the biggest winner so far has been the Financials sector, based on the presumption that Trump’s administration will adopt a less antagonistic posture towards banks than Clinton’s would have.  During the past week the Financial Select Sector SPDR ETF (XLF) jumped 9.4%, or more than four times the increase in the overall stock market. That strength was also evident in three of our PF Growth Portfolio holdings from the Financials sector: Ameriprise Financial (AMP) +25.6%, Discover Financial Services (DFS) +13.9% and Wells Fargo (WFC) +13.5%.

Also helping banks is the belief that Trump’s proposed infrastructure spending will boost economic growth in the near term, prompting the Fed to raise interest rates at a faster pace than anticipated under a Clinton administration. Higher rates would be good for banks, which would allow them to realize a bigger spread between the rate at which they lend money to borrowers and the rate that they borrow it from depositors.  Given the huge run-up in the financials, it may be too late to cash in on them now.

But it’s not only bank stocks that are seeing big gains. Lost in all the rhetoric surrounding Trump’s still-evolving economic agenda is this fundamental truth: some companies are just plain better than others at generating profits independent of politics. For example, Best Buy (BBY) released its third quarter earnings report on Thursday morning that came in way above expectations, igniting a 15% jump in its share price in one day. And that’s on top of a 25% increase in the months leading up to this announcement as I discussed last month (“Wall Street Jumps on the Best Buy Bandwagon”).

I have been pounding the table on Best Buy for the past year as it methodically delivered impressive earnings results, while other analysts ignored it in favor of sexier stocks and are only now jumping on the bandwagon after its share price has risen nearly 50%.

Other stocks are seeing a big lift in their share prices based on the Trump regime, but those are mere expectations. That’s different than companies such as Best Buys who have proven they have the goods today. While I’d like to believe that Union Pacific (UNP) will make more money next year assuming increased coal shipments under less stringent environmental policies, the 8% jump in its share price during the past week strikes me as excessive for something yet to be proven.

Conversely, I also don’t buy the idea that certain technology stocks are suddenly worth less due to concerns over a possible trade war with China. The Vanguard Information Technology ETF (VGT) dropped by 2% in the days immediately following last week’s election, but has since recovered after investors thought harder about what tech companies could do with all that cash they have sitting offshore if Trump succeeds in finding an agreeable way for them to bring it back to the U.S.  

All of the above illustrates why I am excited for 2017. The combination of “known unknowns”, such as the possibility of trillions of dollars being reinvested into the U.S. economy by tech companies, plus all the “unknown unknowns” emanating from the myriad ways tax reform, deregulation and infrastructure spending could reshape our economy, will create many new investment opportunities. Financial stocks may be among the first wave of winners under this new economic paradigm, but they certainly won’t be the last.


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