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The nagging Trump rally question on every investor's mind has been answered

Jamie Dimon, chairman and chief executive officer of JPMorgan Chase
Laura McDermott | Bloomberg | Getty Images
Jamie Dimon, chairman and chief executive officer of JPMorgan Chase

JPMorgan chairman and CEO Jamie Dimon said on Friday he is comforted by a Trump administration. He's not the only one who should feel that way.

The nagging question on the tip of every investor's tongue is whether or not the Trump stock market rally had gone too far, too fast. The market has been flat since mid- December. But after seeing the earnings reports from our nation's biggest banks on Friday, the answer is no. And the feeling of relief to those who follow financial markets closely is difficult to overstate.

"Ask any market veteran if they think it is a positive when banks lead rallies, they'll say yes, in unison."

Why? Bank stocks have led the rally since last November's presidential election, going from unloved by investors to becoming anchor positions in many a portfolio. After years of suffering the indignity of massive fines, increased regulatory oversight and receiving the blame for the Great Recession, bank stocks have replaced consumer staples and utilities as the must-own stocks.

Ask any market veteran if they think it is a positive when banks lead rallies, they'll say yes, in unison. Simply put, when banks lead a stock market rally, it is an indicator that loan demand is rising, that business is percolating and that the economy is on firmer footing. It's also the go-to investment choice if one believes interest rates are heading higher. Banks make more money on their net interest margin, meaning they make more money on their massive customer deposits.

But today was the moment of truth for the Trump rally because JPMorgan, Bank of America and scandal-plagued Wells Fargo reported quarterly earnings for the first time since the election. Investors were worried these banks wouldn't be able to live up to their elevated expectations.

JPMorgan takes the title as the best beat on both earnings and revenues and otherwise, a squeaky clean quarter from the nation's biggest bank. Bank of America beat the bottom line, with a small miss on the top line and an optimistic forecast going forward. Wells Fargo had a tough quarter, but based on how the stock is performing today, investors are obviously pleased that it didn't do worse in spite of its recent scandal. JPMorgan and Bank of America touched new 52-week highs on Friday.

Additionally, the quarterly reports from the aforementioned banks corroborate other glowing news on the economy. Consumer sentiment, holiday sales, wage growth and automobile sales have been either elevated or improving as of late. Yet interest rates and inflation remain historically low. This is about as Goldilocks for investors as it gets.

No one could, or should, rule out future stock market volatility, which has always been a normal occurrence. But if you view banks as the economy's canary in the coalmine, as I do, then you've got some pretty darn healthy canaries. Stop doubting the rally. It's the real deal.

By Mitch Goldberg, president of ClientFirst Strategy

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