Why Big Banks Love Trump

The Trump tailwind is about to blow through lower Manhattan, and when it does, there will be one group of smiling souls… Big Banks.

Now, before we go any further, know that I am a huge proponent of Big Banks. Not only am I a veteran of one, having formerly worked for Morgan Stanley and at the World Trade Center, but I am also a philosophic advocate of the role Big Banks play in human action.

You see, you can’t have capitalism with the “capital,” and capital is what Big Banks provide. And as much as this industry is hated by a segment of society that wants to demonize the effective use of capital in the pursuit of profit, that hate is not only terribly misguided and vengeful, but it also reflects a stunning lack of knowledge about how markets and the economy function.

Still, the question remains: Why do Big Banks love Trump?

The answer is perhaps best revealed by one of the best banking and financial sector analysts out there, Wells Fargo’s Mike Mayo. In a note to clients, Mayo wrote that Trump’s victory will be a “regulatory game changer” for the banking sector. Mayo added that the new Trump administration could mean “more free markets, less harsh oversight” and reduced regulatory risk.

More free markets and more capitalism equals more freedom. And more freedom equals a more virtuous society.

This is the kind of milieu that would almost certainly stimulate investment banking revenue and loan growth, as it would represent a return to an explicit, pro-business mentality, one that has been sublimated in recent years by the Biden administration.

So, from a practical, “What’s in it for Moi?” angle (you know I look at the world through these lenses), how can we, as investors, make more money in this space?

The answer here is there are multiple ways to play the love between Big Banks and a new Trump regulatory framework, all of which I consider sound.

First, you can buy the biggest exchange-traded funds (ETFs) pegged to the fate of the financial sector. Here, I would look at funds whose holdings contain the Big Banks, which include the Financial Select Sector SPDR Fund (XLF) and the Invesco KBW Bank ETF (KBWB).

Both of these ETFs hold the biggest and the best of the Big Banks, including Goldman Sachs (GS), JPMorgan Chase & Co. (JPM), Bank of America (BAC), Morgan Stanley (MS) and Wells Fargo (WFC) to name just a few. Yet, both hold different banks and financial institutions at different percentages, so you aren’t owning the exact same stocks within these two funds.

More aggressive investors may also want to consider leveraged ETFs in the sector. For example, the ProShares Ultra Financials (UYG) seeks to deliver twice the daily performance of its underlying benchmark index, the S&P Financial Select Sector Index. So, if the S&P Financial Select Sector Index is up 2%, then UYG is designed to move higher by 4%.

Chart courtesy of www.stockcharts.com

Keep in mind, however, that if you use a leveraged fund such as UYG (or any leveraged ETF), it should only be used as a trading vehicle, not as a core holding.

Here’s an example of a short-term move in UYG. Since its close on Nov. 4, one session before Election Day, the fund has spiked nearly 14%! Indeed, you can see that big gap higher in the shares in the chart above.

Here we have a demonstration of why Big Banks love Trump, and how investors can bathe in the afterglow of that love.

Let’s just hope that love can be nurtured over the course of the next four years, and let’s hope it’s not tainted by what I consider to be very perilous chatter on the tariff front. Oh, and trust me, the tariff topic will be the subject of this column in the weeks and months to come, so prepare for the fight.

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Wooden Wisdom

“Whatever you do in life, surround yourself with smart people who’ll argue with you.”

–Coach John Wooden

A very good friend just sent me some quotes from the great John Wooden. When I was an undergraduate at UCLA, Wooden’s presence was unmistakable, with tributes to the famed basketball coach all over campus. In this quote, he reminds us that we should always have people around us that lift us up, that challenge our thinking and that aren’t afraid to tell us when we mess up. This is the opposite of having “yes men” and “loyalists” surrounding us. If you want to be better, surround yourself with truthtellers.

Wisdom about money, investing and life can be found anywhere. If you have a good quote that you’d like me to share with your fellow readers, send it to me, along with any comments, questions and suggestions you have about my newsletters, seminars or anything else. Click here to ask Jim.

In the name of the best within us,

Jim Woods