I continue to believe we won’t see a rate hike until December at the earliest, and this morning’s jobs report makes that seem even likelier. Still, some of the sectors that historically do well in a rising-interest-rate environment should begin to outperform in anticipation of the next move. Financials are one of those sectors, and Bank of America Corp (NYSE:BAC) stock in particular should benefit.
Federal Reserve Chair Janet Yellen gave her much-anticipated speech at Jackson Hole last Friday, and while the speech itself didn’t contain any new language about raising interest rates, Yellen’s tone left the door open for a hike during the central bank’s September meeting. She also hedged by making any changes dependent on economic numbers between now and then.
The odds of the Fed making a move in September rose from next to zero to 36% by the end of Friday’s trading. And while those chances dipped after today’s earnings, BAC stock is still holding strong.
Bank of America has been steadily climbing since putting in a near-term bottom of $12.18 amid the Brexit selloff, easily taking out both the 50- and 200-day moving averages as well as price resistance at the $15 area. While BAC stock may appear overbought to some in the short term, I actually believe a run at the 52-week high is inevitable.
BAC Stock Chart
Since blowing through previous resistance at $15 and converting that area into support, there is no clear short-term resistance on BofA’s chart. But looking longer-term, you can see that there is resistance around $18 — an area where BAC stock has failed four times since early 2014.
I expect BAC to make a run at those prices in the coming months, although after such a strong uptrend I wouldn’t be surprised to see a healthy, short-term pullback. That said, the momentum is on the side of the stock. And from a fundamental perspective, the shares are attractive with a forward PE of 10.5 and solid dividend yield of 1.9%.
The recent strength in Bank of America is the result of the potential for rising interest rates. In fact, the entire financial industry is rallying, with the Financial Select Sector SPDR ETF (NYSEARCA:XLF) at its best level since December 2015. The 10-year Treasury yield is currently sitting at 1.57%. And while it has yet to break out, if and when it does it will be yet another boost to both the financials as a whole and BAC in particular.
If you already own BAC, I think it’s worth holding on to here. If you don’t own it, I believe it’s worth looking at on any weakness back down toward $15. However, while I do see upside here, the safer play may be to consider investing in XLF as it gives you exposure to strength in the entire industry rather than just one name.
