Big banks have allies in Washington—namely, an administration packed with ex-bankers pledging to cut taxes, reduce regulations, and boost infrastructure spending. On top of that, the Federal Reserve’s plan to steadily raise interest rates is a boon for banks’ margins.
Shortly after Donald Trump was elected, these factors boosted bank stocks in a big way. Then, as the new president’s agenda got bogged down, the market treaded water for a while. Over the past month or so, the enthusiasm for big banks has returned; JPMorgan’s stock is trading at an all-time record high.
Big US lenders are benefiting from hopes that economic growth will continue to improve, that rising interest rates will make their businesses more profitable, and that regulations will be relaxed, according to Richard Turnill, BlackRock’s global chief investment strategist. The KBW Nasdaq Bank Index of large US commercial lenders rose nearly 7% in September, compared with a gain of around 2% for the S&P 500.
Wall Street’s most recent boost stems from the Trump administration’s drive, announced last week, to reduce tax rates, which the White House says will spur economic growth (a debatable proposition). So far, betting on legislative success hasn’t been a winning strategy, with stalled efforts on infrastructure and health care marking the early months of Trump’s term.
Perhaps Fed policy is more of a sure thing. Last week, Fed chair Janet Yellen said the central bank plans to keep raising interest rates, part of a multi-year process of unwinding its stimulus program that’s kept financing costs contained. Banks can make more money when rates rise because they profit from the gap between their borrowing costs (deposits, and money they raise in the bond market) and lending it out for longer periods at higher rates.
The central bank also plays a key role in regulating Wall Street, and Trump has met with potential successors to Yellen, whose term is up in February. The president and Treasury secretary Steven Mnuchin met with Fed governor Jerome Powell and former Fed governor Kevin Warsh last week, according to the Wall Street Journal (paywall). Warsh has expressed skepticism about the current model for post-crisis bank regulation and monetary policy. Powell, meanwhile, appears to favor looser policy and a softer touch when it comes to lenders.