If you're an investor in bank stocks, you'd be excused for wondering why they've been in retreat, with the KBW Bank Index closing down the past five days in a row. What's behind the decline? It's impossible to say for sure, but you'd be excused for thinking that the growing sense of uncertainty coursing through the markets is the culprit.
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Priming the pump for bank stocks
Make no mistake about it, the past year has been more than kind to bank stocks. If you take a list of the 20 biggest banks in the country, their shares are up by an average of 33% over the past 12 months. Bank of America (NYSE: BAC) has led the way, with a 58% rally. Even the worst performing big-bank stocks have done pretty well, with Bank of New York Mellon's performance coming in last on the KBW Bank Index, but nevertheless up by 17%.
The catalyst for the rally in bank stocks was the unexpected outcome of last year's presidential election. On the campaign trail, then-candidate Donald Trump promised to slash regulations and corporate taxes, both of which would free up banks to make more money. This is what sent shares of Bank of America and other banks up sharply in the days after the election.
Since then, bank stocks have continued to move higher. Some of this can be attributed to good news about the economy, with the unemployment rate now at only 4.1%. Another source for optimism in the bank industry has been rising interest rates, which allow banks to earn more from their portfolios of loans and securities. To this end, the Federal Reserve has boosted the fed funds rate three times since this time last year.
Is the market starting to fray?
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While all of this is good news, there's reason to believe that investors have gotten ahead of themselves when it comes to bank stocks. This is what we seem to be seeing now, as the sector has given back gains over the past week.
Most importantly right now, it remains to be seen whether Congress will be able to cut corporate taxes. The majority party in the House of Representatives and the Senate are trying to do so now, but it's far from certain that they'll be able to get it done.
"I remain concerned over how the current tax reform proposals will grow the already staggering national debt by opting for short-term fixes while ignoring long-term problems for taxpayers and the economy," said Senator Jeff Flake on Thursday. "We must achieve real tax reform crafted in a fiscally responsible manner. I look forward to working with my colleagues during a full and robust debate on the Senate floor to deliver on that goal."
"Pleased to see #TaxReform is moving through the regular order w/ hearings, markup, debate & amendments," tweeted Senator John McCain. "I've long believed we need to fix our burdensome tax system & am reviewing the Senate bill to ensure it benefits the people of #Arizona."
Pleased to see #TaxReform is moving through the regular order w/ hearings, markup, debate & amendments. I've long believed we need to fix our burdensome tax system & am reviewing the Senate bill to ensure it benefits the people of #Arizona.— John McCain (@SenJohnMcCain) November 9, 2017
These may seem supportive, but they imply that at least two Republican senators are worried about the national debt -- which, until recently, was a cornerstone of the Republican agenda. On top of this, McCain's point about regular order implies that at least some members of the caucus will require any tax plan to be scored by the Congressional Budget Office, which recently estimated that the tax plan submitted by the House of Representatives would add $1.7 trillion to the national debt over the next 10 years.
All of this suggests that tax reform isn't going to be as easy as one might think it would be with both the legislative and executive branches of government controlled by one party. Consequently, for bank stocks that were bid up in anticipation of tax reform, it's reasonable to see them retreat as it becomes clearer what a difficult task reforming the tax code may end up being.
Add to this the uncertainty around recent events in the Middle East, with a growing conflict between a Saudi Arabian-backed group of states and an Iranian-backed group. And then there's North Korea and the pending Brexit in the United Kingdom, which will remove it from the European Union.
In short, if you're wondering why bank stocks have retreated recently, the uncertainty caused by the current domestic and global political situations seems to be a good place to start to find an answer.
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