After running up by 20% or more since the presidential election in November, bank stocks have now recorded two consecutive days of losses. It's still early, but it's worth asking the question whether investors have already begun to lose confidence in bank stocks.
Buy the rumor...
An old maxim of the markets is that investors should "buy the rumor and sell the news." In this case, the rumors that recently propelled shares of Bank of America (NYSE:BAC), JPMorgan Chase (NYSE:JPM), and Wells Fargo (NYSE:WFC), among others, centered around the perceived benefit that the sector would see from the changeover in presidential administrations.
Trump came into office vowing to cut regulations, decrease taxes, and invest in infrastructure projects. Holding all else equal, all of these would be good for bank stocks.
Just this week, he characterized the 2010 Dodd-Frank Act as a "disaster" and promised to "do a big number" on it soon. It's impossible to say for sure what he means by this, though some of it is undoubtedly hyperbole and seems to evidence a lack of appreciation for the aspects of Dodd-Frank that are embraced by even the financial services industry.
But either way, it's true that an overly oppressive regulatory environment has weighed heavily on banks' top and bottom lines since the financial crisis eight years ago. Bank of America, JPMorgan Chase, and Wells Fargo have felt this more than most, as Dodd-Frank subjects the nation's biggest banks to particularly onerous rules.
Banks must now hold more capital, keep their balance sheets more liquid, pass annual stress tests, and submit plans to regulators each year detailing how they would be resolved in the event of a bankruptcy. These rules are costly, of questionable value in certain cases, and make it hard for banks to generate the type of profitability that investors expect from large financial institutions.
...Sell the news
It should be no surprise, in turn, that investors perceived all of this to be good for bank stocks. The problem now, however, is that the rubber is meeting the road. We've now moved beyond rumor and into news, in other words.
The events of the past week, in particular, have begun to lead major institutional investors to question whether things will turn out as well as initially thought.
Ray Dalio, the founder and CEO of the world's largest hedge fund, Bridgewater Associates, said in a letter to clients this week that he's no longer optimistic that the current administration's pro-business agenda will necessarily outweigh its populist policies.
"We are now in a period of time when how this balance tilts will be more important to the economy, markets, and our well-beings than normally dominant drivers such as central bank policies," he noted. Dalio went on to say that the current environment is marked by "exceptional uncertainty." As a result, he recommended that investors limit themselves to easy-to-sell assets.
And the managers of Carlson Capital, a $1.5 billion fund based in Minnesota, sounded an alarm about the repercussions of protectionism and a trade war. "If the border adjustment mechanism is implemented as proposed, we think it will cause a global depression and a major equity market decline," they wrote this week in a letter to clients. "It is still unclear whether it will happen but at the very least we expect that U.S. trade policy will put downward pressure on global growth."
I can't say for certain what motivated these financiers to offer such dire warnings, particularly when you consider that Dalio was originally optimistic about the new administration. But what is safe to say is that this seems to represent an inflection point in Wall Street's reading of the unfolding economic and political situation in the country.
Again, this could all be premature. But if it's not, then it could be bad news for JPMorgan Chase, Bank of America, Wells Fargo, and other banks, which saw their shares soar on positive rumors over the past three months, only to now be confronted by the news.