Last week, the awakening began. In the tawny uptown offices, big banks reported mostly dismal results and warned the economic Trump bump was more smoke than fire.
The contrast from January is stark. Then, favorable earnings comparisons and the presidential honeymoon led many to promise the start of something big. However, recent conference calls were about plummeting consumer loan growth, delinquencies and policy uncertainty.
The fact that so many got it so wrong is not a surprise. It was wishful thinking.
It’s something legendary trader Jesse Livermore understood well. The 1923 classic Reminiscences of a Stock Operator, counselled traders against making feel-good investment decisions that ignored rational evidence. Livermore knew there are no easy fixes to big problems.
Last week, bank leaders tamped down enthusiasm. The Wall Street Journal reported that Jamie Dimon, CEO of JP Morgan (JPM), admonished analysts it “would be just silly” to expect a new president to easily push through his agenda during the “sausage making period.”
That’s an understatement. Republicans could not keep their seven-year-old promise to repeal and replace the Affordable Care Act despite having control of Congress and the White House. Sure, they are likely to take another run at it. But that effort also delays tax reform.
Consumers could use some help. Despite stronger sentiment, actual consumer lending is falling off a cliff. Credit card delinquencies are rising, too.
At Wells Fargo (WFC), car loans are down 29%. The news is not much better elsewhere. In fact, North American consumer banking profits at Citigroup (C), JP Morgan and Wells Fargo fell 25%, 20% and 9% respectively.
The problems are not new. Last November, the New York Federal Reserve noted six million Americans stopped paying their auto loans. Stagnant wages and rising costs are hurting. Average consumers feel stretched. It’s pain that should have been the message of the November presidential election.
Sadly, relief is not near. In March, the Federal Reserve bumped short-term rates higher and suggested more increases are in the offing. While this helps banks — they make money with higher spreads between their short-term borrowing and longer-term lending rates — it means even higher payments for consumer loans. It means more pain.
Following the presidential election, many assumed a flurry of tax and regulatory reforms would instantly lead to a stronger economy. Stocks, particularly banks, spurted higher. The idea was as intoxicating as it was flawed.
Tax and regulatory reform is not easy. Making sausage is messy and ugly.
Now investors are waking to the reality real reform might be several months away even as economic pressure points persist. They are getting nervous. They are beginning to question the post-election leadership of financials. Wishful thinking is meeting reality.
Shares of the SPDR Financials (XLF) rose from a low $19.50 following the election, to $25.25 in March. Since that time, most of the price action has been below the 50-day moving average at $24. This is worrisome and suggests more weakness.
Bank shares could even fully reverse the gains from November.
Livermore prided himself in making rational investment decisions based on the evidence. He would have respected the November rally. He also would have been mindful of the more recent weakness and the growing set of negative economic data.