Financial stocks led a sell-off on the stock market on Tuesday as investors are growing increasingly skeptical about the timetable for improvement in the banking sector.
Bank stocks have been among the market leaders since the election, but the Financial Select Sector SPDR Fund (ticker: XLF) was down by more than 2 percent on Tuesday, dragging down the Standard & Poor’s 500 index by more than 0.7 percent.
Since the election, the XLF ETF has gained 18.9 percent on hopes that President Donald Trump would usher in a new period of prosperity for banks by deregulating the financial sector and aggressively cutting corporate tax rates. Instead, Trump and Republicans in Congress have made it clear that health care reform is the top priority, and a growing number of investors now seem concerned that tax cuts and deregulation have become afterthoughts in Washington.
“If we can’t get health care reform soon, that doesn’t mean we won’t get tax reform,” Wunderlich analyst Art Hogan says. “It just means it will come later, but the market is not priced in for that.”
Bank investors may be concerned about the outcome of an important House vote on Trump’s health care bill coming on Thursday. The more time Trump and Congress spend on health care, the more of a delay the rest of his policies may face.
“Any resistance that Trump’s policies encounter in Congress is going to make tax reform more difficult,” J.P. Morgan analyst David Lebovitz says. “The reason we’re so focused on taxes is because if we get lower tax rates, that inherently adds value to the equity market.”
Much of that implied added value may have already been priced into stocks during the post-election market rally. The S&P 500 is already up 10 percent since Nov. 8.
The other driving force for bank stocks these days is rising interest rates. Higher interest rates typically allow banks to generate more profits off of deposits. Last week, the Federal Reserve issued its second 0.25 percent rate hike in four months. However, The Fed’s outlook for two additional rate hikes this year fell…
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