Is Trump trade tired?

The 16-company strong Major Regional Bank industry stands out in Zacks Industry Ranks during these late spring days.

Major regional banks ranked #47 out of 265 Zacks industries at the end of April, down from #35 the previous week. For the final spring week of April, there has been six upside analyst earnings revisions and just two downside revisions.

What have Regional Bank share prices done recently? The iShares U.S. Regional Bank ETF (IAT) shot up from $36 a share at the time of the U.S. presidential election to $46 by the end of 2016. The ETF then hit a spiky high of $49 a share on March 1. Now, shares trade at $45 (see chart).

That’s a tell; regional banks are an outstanding example of a “Trump trade.”

What does that mean? For this banking niche, Trump Trade tangible benefits took two forms. One was the promise of a lower corporate tax rate, and the second was the potential for relief from Dodd-Frank regulation. Even those analysts who don’t believe there will be a repeal of Dodd-Frank expect some relief for smaller banks from some of its most onerous rules.

In late April, after a March Fed rate hike enhanced bank interest margins, Zacks still ranks this top Regional Bank ETF a #1 Rank (STRONG BUY). The ETF dividend yield rests at 1.46%. With respect to specific stocks in the sector, Zacks has the following recommendations: PNC Financial Services Group (PNC), which has an11.2% ETF weight; Comerica, which has a 2.35% weight and Northern Trust, which is not included

Annual forward earnings estimate revisions drive our Zacks Rank system. In light of this, take a very close look into what analysts covering this banking niche have to say.

With the latest pullback in the iShares Regional Bank ETF, one has to ask: Are traders becoming more skeptical on the benefits of the Trump Trade? Are they revisiting policy changes that matter to regional banks? Are proposed corporate tax cuts getting less tasty? Are proposed Dodd-Frank reform benefits getting downsized?

Tidy answers are not forthcoming. Maybe the latest share price pullback was an overdue profit-taking exercise. The six positive analyst estimate revisions in late April — after Trump proposed 15% a rate on corporate taxes — did generate modest excitement.

But we are nearing a point where real policy prescriptions, not just proposals, must happen to maintain a bullish outlook. In the meantime, let’s take the advice of financial services firm Stephens Inc. regional banking analyst, Matt Olney. Be more selective with your Regional Bank picks.

3 Top Zacks Rank Picks in Regional Banking--

(1) Comerica (CMA): This is a Zacks #1 Rank (STRONG BUY) stock.

(2) Northern Trust (NTRS): This is a Zacks #2 Rank (BUY) stock.

(3) PNC Financial Services Group (PNC): This is a Zacks #2 Rank (BUY) stock.

 

About the Author

John Blank, Zacks Investment Research