By Telis Demos and Emily Glazer
Investors in bank stocks greeted Donald Trump's presidential victory with cheers, reflecting hopes for stronger growth and a lighter regulatory burden. But analysts warned the stocks still face threats from increased political risk or a rise in U.S. protectionism.
Shares in big U.S. banks were up markedly Wednesday morning. Stock in Bank of America Corp. jumped around 5%. J.P. Morgan Chase & Co., Morgan Stanley and Wells Fargo & Co. were all up more than 3%.
While Mr. Trump's potential handling of the economy, trade deals and financial regulation remain open questions, the immediate issue for banks is how they will contend with a second spurt of volatility this year in reaction to a surprise populist-leaning vote in a major economy.
While rapid, post-election market moves can prove dicey for investors, trading-intensive banks such as Goldman Sachs Group Inc., J.P. Morgan and Morgan Stanley could benefit from heightened volatility. As investors adjust portfolios to reflect the electoral outcome and market reaction, trading revenue should benefit.
Because Mr. Trump hasn't held elected office before and because his campaign eschewed detailed policy proposals, there is likely to be greater uncertainty for banks and other industries coming out of this vote than past presidential elections. But that also offers opportunity, especially when it comes to the regulatory environment.
For financials, "everything is in play," noted FBR & Co. analyst Edward Mills in a note Wednesday morning. Uncertainty ranges from the U.S. Federal Reserve and the future of Janet Yellen's chairmanship to the outlook for the Dodd-Frank Act and regulation to the fate of the Consumer Financial Protection Bureau and its head Richard Cordray, he noted.
Still, Mr. Trump's victory could help bank stocks outperform other sectors, some analysts say. Guy Moszkowski, an analyst at Autonomous Research, said that if the volatility seen on election night persists, "you could have some significant interest rate and stock market activity. If they're within reason, rather than a collapse in valuations, you could see a pretty active fourth quarter and first quarter next year, during the critical first 100 days of any presidency."
Goldman and Morgan Stanley, among other banks, benefited from volatility in the third quarter after the U.K.'s Brexit vote. Mr. Moszkowski said potential policy implications of the election are harder to predict, and likely wouldn't factor into near-term trading.
A Trump victory could lead to "a more business-friendly political climate," said Bill Smead, who leads Seattle-based Smead Capital Management and has invested in bank stocks like J.P. Morgan and Wells Fargo for years. "We like being owners of these banks despite the overnight selloff in common stocks."
He added: "Bank stocks have been besieged by Dodd-Frank regulations and a climate not conducive to supporting a stronger level of economic growth."
Mr. Trump's victory might turn bankers more hopeful of some relief on Dodd-Frank rules that have crimped some of their business lines. But there is also concern a protectionist turn in the U.S. under a Trump presidency would be a negative for the industry. Such a move could also force investors to take a tough look at banks with large international businesses.
"Dodd-Frank is done for," Karen Petrou of Federal Financial Analytics wrote in a research note Wednesday. While she said the law would only change over time, its structural assumptions about regulation are "smashed."
For big banks, though, this could prove a threat. Populist forces on both sides of the political aisle could squeeze them, Ms. Petrou added. Mr. Trump's campaign, for example, had spoken of a Glass-Steagall Act for the 21st century. That was the Depression-era law that created a wall between commercial- and investment-banking activities.
A decline in cross-border capital flows could hurt banks that focus on serving companies rather than individuals, as would restrictions on people movement and immigration, this person said. On the other hand, if Mr. Trump makes good on promises of U.S. infrastructure investment and lower taxes, it could boost the economy and steepen the yield curve, which could help banks, as more firms issue bonds and interest income rises, said Mr. Moszkowski.
Currencies were expected to react the most to the Trump victory, according to a J.P. Morgan strategy report last week, since "his protectionist trade measures (tariffs on Chinese and Mexican imports) are easiest to implement via executive order" than a fiscal program requiring congressional approval.
The note added: "Although Trump fiscal proposals are negative for Treasurys over the medium term, his bellicose trade rhetoric probably dominates near-term to weaken risky markets, so would push back expectations of Fed tightening."
Any delay in Fed tightening would hurt profitability prospects of a host of Main Street banks that collect interest income that generally rises along with Fed interest rates.
But banks stocks, despite a bounce earlier this week, remain relatively cheap versus other sectors, said David Kelly, chief global strategist at J.P. Morgan Chase. He added that financial shares could benefit from higher interest rates, which are expected in the long term. And if Mr. Trump follows through on reducing regulations, financials could also benefit.
The main driver of bank shares, though, will be economic growth and it will take time to see if the new political reality produces that. "Clearly populism is a very successful political strategy," Mr. Kelly said. "But whether it turns out to be a very successful economic strategy is another question entirely."
Write to Telis Demos at email@example.com and Emily Glazer at firstname.lastname@example.org
(END) Dow Jones Newswires
November 09, 2016 11:24 ET (16:24 GMT)
Copyright (c) 2016 Dow Jones & Company, Inc.