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Why Trump’s Fiscal Policies Are So Good for Banks' Potential Profits

By Motley Fool Staff – Nov 25, 2016 at 5:23PM

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If you’re wondering why bank stocks have climbed double digits since the presidential election, take a look at President-elect Donald Trump’s proposals for fiscal policy.

Bank stocks have soared since Donald Trump was elected president two weeks ago. There are a number of reasons for this, but one of the most obvious relates to his plans to increase fiscal spending and decrease taxes.

In this clip from Industry Focus: Financials, The Motley Fool's John Maxfield and Gaby Lapera discuss why Trump's proposed fiscal policies could spur profits at the nation's largest banks.

A full transcript follows the video.

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This podcast was recorded on Nov. 21, 2016.

Gaby Lapera: I don't know if you've noticed, but after the election, the KBW Banking Index, which tracks how banks are doing at large, is up about 14% since Nov. 8, which is a lot for banks. In general, there's a reason for this, and it's because in general, people think that the Trump administration is going to be very positive for banks. Right, Maxfield?

John Maxfield: Yeah, that's exactly right. Here's what's interesting: Going into the election, a lot of people were thinking that if Trump were elected, that stocks were going to fall precipitously. But actually, the opposite happened, which creates this interesting irony. Here, you have a Republican -- and we'll get into all these different reasons, but one of the reasons that stocks went up so much, bank stocks in particular, is because here you have a Republican coming out and being really pro-growth economically, but not in terms of just reducing regulations, but in terms of massive fiscal expenditures. Just, when you're looking at the market overall and why it's gone in that direction, that's one of the reasons.

Lapera: Yeah. Part of the reason that stocks dropped during the election and right before is because there's so much volatility, they didn't know who was going to be president, and it seemed unclear what would happen if either one would become president. Let's talk about what the Trump administration has said. I will say, sometimes the Trump administration has said different things on the same topic, so we will do our best to cover that. We'll try our best, OK? Everyone knows that campaign promises and what actually happens sometimes don't 100% line up. Again, we're covering what they said during the campaign, what's coming out now. Having said that, we also know that we don't really 100% know what's going to happen when Trump becomes president. It's always a roll of the dice. Especially living in D.C., you know that Congress sometimes pushes things through and sometimes says, "Ha-ha, no, thank you." You never really know what's going to actually happen, despite whatever campaign promises were given.

Maxfield: That's exactly right. To dig in to banks in particular, this is the financials podcast, I'm a banking guy; you're an editor of our financial bureau. One of the biggest questions is, what are the exact reasons that have caused investors to bid up bank stocks so far since Donald Trump was elected? We were talking about this before the show; we identified three different reasons. The first, which I alluded to already, is that Trump has come out and said that one of his principal priorities is to get the economy growing at a much faster pace. Again, they haven't provided a ton of details around their ideas in this regard. But I think we can break it down into three different things, in terms of their attempt to spur the economy.

The first is, they are recommending a huge infrastructure project, a huge investment in infrastructure --

Lapera: When you say huge, you mean $1 trillion, which is a lot of money. A lot of money.

Maxfield: Yeah. They're talking about absolutely huge numbers. The great thing -- well, "great" is probably not the right adjective -- but it's an irony, because what we're talking about here is a full-throated embrace of Keynesian economics, which suggests that the way to get an economy out of a funk is through higher government expenditures. Of course, that has been anathema to the Republican Party, basically ever since Keynes recommended that in the 1930s.

Lapera: Yeah, it's been interesting because the Republicans have pretty consistently recommended infrastructure bills, but it has never gotten through Congress, because the funding for it is always in the air. And that is one thing with this infrastructure project -- not a lot of details on how the funding will appear have come forth yet. So we'll see how that happens, when we get more details on the bill.

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