Over the past year and a half, the U.S.-China trade war has dominated the economic and business discourse: to no one’s surprise, a poor relationship with the world’s second-biggest economy is a dark cloud. But thanks to recent positive sentiment from both camps, we may see a trade deal. As a result, the big banks have moved higher in the investment markets.
On the surface, buying the big banks may seem like a sound strategy. As economic bellwethers, wherever they go, the rest of the country (generally) follows. With such robust swings in market valuations, it’s easy to assume that the Trump administration finally has a handle on this pressing issue.
Still, I’m hesitant on the big banks. While they’re indeed bellwethers, they can be harbingers just as easily. Any unforeseen issues in the economy could send these stocks cratering. And if they tumble, I doubt that the rest of the markets will move against the grain.
Second, we’ve seen many head-fakes with the trade war and associated negotiations. Around this time last year, Americans eagerly anticipated a resolution, only to be disappointed. Further, the Chinese are adamant about not making big concessions. Although the recent thawing in tensions is a positive development, it could quickly backfire.
Remember that among the many attributes of President Trump, patience is not one of them.
Big Banks Are Losing Viable Revenue Streams
Still, let’s assume that negotiations go favorably, resulting in a substantive trade deal. Is that enough to justify a shot with the big banks?
Even here, I’ll be hesitant. We’ve all heard stories about how many Americans are not saving enough for retirement or for other major life events. Thus, a catastrophic incident would impose either crippling financial pain or force the affected to see debt financing. And according to data provided by the Federal Reserve, the personal saving rate has been flat for decades.
Thus, banking institutions no longer have “balance sheet” income to look forward to. But in terms of revenues from activities such as loans for real estate and commercial enterprises, these stats are also flatlining on a logarithmic scale.
Even with a China trade deal, that won’t make real estate prices affordable for millions of Americans, particularly millennials who are essentially left holding the bag. Worse yet, President Trump has demanded the Fed impose an aggressive monetary policy. That would only make real estate even more inaccessible.
Therefore, while the banking stocks may be enjoying a burst in enthusiasm, I would maintain vigilance. Underneath the noise are some ugly metrics to consider.