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Bank stocks have acted as the leader during the post-election rally but were the biggest drag during Tuesday's market sell-off. One analyst thinks the trend has only just started.
Bursting higher on a belief that stronger growth would boost interest rates while regulations would be rolled back, the industry has been on a tear. The KBW Nasdaq Bank Index is up more than 25 percent since Donald Trump won the presidency Nov. 8.
However, analyst Dick Bove believes banks — he mentioned JPMorgan Chase specifically in a note to clients — have been rising for "the wrong reasons" and are in for a sell-off now that some realities have begun to sink in.
Specifically, he sees the Trump agenda getting blocked as the White House remains mired in a fight over a new health-care plan and multiple other clashes and controversies on Capitol Hill.
"There's a reason why all these bank stocks are cratering. It's because of the belief that none of the Trump programs will be put into effect," Bove, vice president of equity research at Rafferty Capital Markets, said in a phone interview. "There won't be enough money in the government to allow for a tax cut and fiscal stimulus program if in effect the government can't even pay the interest on the debt without borrowing the money."
If the issue merely focused on the debt, it's unclear how much effect that would have on Trump's plans.
As a candidate, he criticized former President Barack Obama for doubling the national IOU during his time in office, but Trump has not provided specifics on how he would reduce the tab. The current debt level is $19.8 trillion, of which $14.4 trillion is owed by the public. The U.S. paid $432.6 billion in debt service for fiscal 2016 and has shelled out $188.2 billion in fiscal 2017.
The political question, though, gets trickier: If Trump gets weighed down and his public approval rating continues to decline, it may be tougher for him to get through his cornerstone promises of lower taxes, less regulation and more infrastructure spending.
Bove compares Trump to a modern-day President William Henry Harrison, who died 31 days into his term and "never was able to put any of his programs into effect." Should Trump fail in his agenda, it would thwart the impetus behind the bank rally.
"The understanding is growing that all of the reasons that people had for buying bank stocks in November are dissipating, they're gone," Bove said.
"If you're not going to get tax cuts, if you're not going to get fiscal stimulus, if day-to-day business is lousy right now, which it is ... if the recognition of all of these factors suddenly dawned on the investor, they do what they're doing right now — they pile out at the exits, they take their profits."
There's no real evidence at this point that tax cuts aren't happening, but the road there does appear to have gotten longer. In the latest Bank of America Merrill Lynch fund manager survey, only 10 percent of respondents said they expect reform to get enacted before the August recess for Congress.
There seemed to be little obvious catalyst for Tuesday's market slide, which saw the major averages lose more than 1 percent apiece. The bank index slid 3.8 percent, and Goldman Sachs alone was responsible for about a quarter of the total point loss in the Dow industrials.
Bove, however, still thinks the long-term picture is good. Once the sector shakes off the froth of the Trump rally, he believes stocks again will turn higher and even could end the year ahead of current levels.
A reckoning will need to occur first, though, he said.
"I don't believe it's going to be a whipsaw effect, where they will sell off today and recover tomorrow," Bove said. "I think it will take a few months for the prices to sell off. People will take another look at these companies and see they are still in pretty good shape, then people will start to buy again. In the near term, they're not going to make a lot of money out of them."