Marisa N. from Detroit, MI asks: I read an article over the weekend that said the Trump rally in Financials may be over, and that maybe the Trump rally in general is finished. What would you say to this? Do you still like Financials stocks and banks?
Mitch Reply: Thanks for writing, Marisa. I think I know the impetus behind the article you encountered over the weekend. They must have been referring to the fact that when the S&P 500 pulled back a bit last week, Financials led the way in the declines. The reasoning here is that since Financials have rallied over 20% since Trump’s election, they could also be the sector that stands to lose the most when the market corrects. In other words, maybe Financials have gone too far too fast, making the sector too expensive and vulnerable to declines.
Matters were made a bit murkier last week when House Republicans failed to bring the American Health Care Act to the floor for a vote. Leadership pulled the measure because it became clear there were not enough votes to clear the House. Healthcare bears very little relation to Financials, but the question arises of how effective the Administration will be at accomplishing other policy objectives, namely tax reform and deregulation in the Financial sector. Banks became more attractive when it seemed clear that the new Administration could effectively roll back portions of Dodd-Frank and lower the corporate tax rate, but now that possibility does not feel like a given at all.
Now let me address your questions directly. For the first part concerning whether I think the Trump rally is over, I would say that I’ve never actually referred to this as a Trump rally at all. I think the market started to price-in the possibility of tax reform and looser regulations, and that led to some of the gains, but I also think it was driven by a strong showing in corporate earnings and expectations for forward-looking earnings. I don’t think that outlook has changed, so my overall outlook for the market remains positive – Trump rally or not.
As to whether I still like Financials and U.S. banks, I would say yes. I think Republicans seem more likely to unite over policies like loosening regulations and reforming the tax code, where they couldn’t find unity over dealing with healthcare. Banks should benefit from broad-based economic growth, looser regulations, and lower corporate tax rates, and I think exposure to Financials in the equity portion of a diversified portfolio makes sense.
Disclosure