US bank shares have staged the sharpest recovery rally since Wall Street emerged from the financial crisis in 2009, underlining the stark shift in investor sentiment that has gathered pace since Donald Trump captured the US presidency.
The S&P 500 banks index, a gauge of the largest US banks, has turned a year-to-date fall that, at its worst, reached almost 25 per cent, to a gain of 8.8 per cent. The more than 30 percentage point recovery is the most vigorous since the bull market began in 2009, when the index cut a 64 per cent tumble to a fall of 8.9 per cent.
The outperformance by bank shares represents a change of fortunes from earlier this year, when they were hit by worries the Federal Reserve would hold interest rates near record lows and over their loans to the embattled US energy sector.
The turnround for bank shares began midyear amid signs that the US economy was improving after an anaemic start to 2016. Their appeal has been further burnished following last week’s victory for Mr Trump, alongside the Republicans keeping control of Congress.
In a sign of growing investor interest, global exchange traded funds that track the shares of financial companies have garnered inflows for seven straight weeks to November 9, taking in $3.5bn over the period, data from EPFR Global show.
Mr Trump’s campaign promises to cut the corporate tax rate and loosen regulations would be “good for cyclical parts of the economy”, particularly banks, said Peter Stournaras, a portfolio manager at BlackRock.
Financial reforms enacted to prevent a repeat of the 2008 financial crisis, including the Dodd-Frank law that Mr Trump has vowed to revamp, have been “oppressive” to lenders’ bottom lines, Mr Stournaras added. “The less punitive regulatory environment will allow banks to start putting capital back to work,” he said.
Lower corporate and personal taxes should also “drive both consumption and investment spend, in turn improving demand for credit and loan growth,” notes Betsy Graseck, an analyst at Morgan Stanley.
Stronger economic growth, spurred by lower taxes and infrastructure spending, may also heat up inflation that, in turn, could force the Fed to increase raise interest rates at a quicker pace.
That spectre has already played out in the fixed income market, where the yield on the 10-year Treasury bond surged from roughly 1.8 per cent before last week’s election to almost 2.30 per cent early on Monday.
“When you see green shoots it’s a tremendous investment opportunity,” Mr Stournaras said of the banks sector, adding that fundamentals were already headed in the right direction even before Mr Trump’s victory.
Still, concerns abound over whether the rally in banks is sustainable.
Mr Stournaras notes that it remains unclear how Mr Trump’s policy initiatives will play out, especially after his divisive and often erratic performance on the campaign trail. There is also the risk that Treasury yields rise too quickly, tightening financial conditions, and causing a blowback that could hit bank shares.
More broadly, Mr Trump’s protectionist trade policies, and the potential for his surprising victory to make way for political risks in other parts of the world could also hit large banks that have substantial international businesses, cautions Morgan Stanley’s Ms Grasec.