Investors are all too aware of Trump’s intentions to make America great again. Plans to repeal Obamacare, push through ambitious tax reforms and kick start the US economy through increased infrastructure spending and de-regulation have been reported on again and again. On the back of this, we saw the now famous ‘Trump Trade’ develop and interest rate sensitive and commodity focused sectors outperform.
With US earnings season in full swing, and most US bank updates out of the way, let’s assess whether investor optimism regarding Trump’s ability to ‘make America great again’ has translated into anything other than a Wall Street rally. Remember, in credit driven economies, merely stirring consumer sentiment can drive economic growth.
Analysis of the major US investment bank earnings updates, reveals that Wall Street has indeed feasted on the Trump Trade. As well as internal trading profits soaring, US banks have also benefitted from larger clients reshuffling their portfolios in anticipation of rising rates and increased equity and debt underwriting fees.
Interestingly, performance of the retail banking side reveals a less clear cut story. Focusing on the more retail focused US investment banks, Bank of America (NYSE:BAC), Citigroup Inc (NYSE:C) and Wells Fargo (NYSE:WFC), gives mixed signals. While the provisions for bad loans at Wells Fargo was very low at 0.34%, consumer loans fell on the back of reduced credit card loans and mortgages. At Bank of America, consumer banking revenues grew even in the face of a falling net interest rate margins (the difference between deposit and borrowing interest rates). At Citi Group, retail banking revenues flagged notably.
As such, we don’t have a clear indication that investor optimism regarding the Trump trade is as of yet translating into the broader economy. While the US economy continues to tick along steadily, it seems that Mr. Trump hasn’t been able to stir consumer sentiment like he has in Wall Street.
Of course, Trump is just beginning to find his feet and it is early in his presidency. He may yet get his ambitious policies through Congress. However, with bonds yields beginning to come off, some believe that the environment for investment banks trading desks will become tougher. If this is the case, another poor quarter from the retail banking side could spell trouble.
Moreover, whether Trump can galvanise the US consumer will of course significantly impact UK equities and as such we will continue to follow events across the pond very closely.