Bank of America Corp (BAC) Stock Is All Love and No Guts

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InvestorPlace contributor Bret Kenwell summed up the financial sector nicely by stating that “Bank stocks have been a tricky trade after their initial post-election run.” Are they ever! When President Donald Trump took office, his opponents begrudgingly conceded that he might be a net positive for the economy. After all, he ran on a message of restoring this country’s industrial infrastructure. However, that hasn’t helped Bank of America Corp (NYSE:BAC) as of late.

BAC Stock: Bank of America Corp (BAC) Stock Is All Love and No Guts

The confusing part is that BAC stock enjoyed a stellar run last year. It posted more than 36% gains for long-embattled shareholders. Bank of America finally compared favorably to the rest of the “big four” banks — JPMorgan Chase & Co. (NYSE:JPM), Citigroup Inc (NYSE:C) and Wells Fargo & Co (NYSE:WFC). Against its primary competition, BofA beat out everybody except JPM, which posted nearly 38% in 2016.

Still, it was a bigly win for the perennial laggard.

Unfortunately, Bank of America looks like its reverting back to its old ways. Although BAC stock is up more than 9% year-to-date, it technically hasn’t moved anywhere since Valentine’s Day. Granted, at this time last year, BofA was down nearly 15% against the January opener. But markets aren’t self-congratulatory, and investors will want to see forward progress.

Adding to the perplexity is the fact that a majority of analysts covering BAC stock are bullish. Furthermore, as of May 2 according to InvestorPlace’s Joseph Hargett, no analysts had a “sell” rating. In the markets, short interest is completely absent. That’s just plain weird.

Major Obstacles Ahead for BAC Stock

I don’t care how great an investment appears — you simply cannot have a healthy market without bulls and bears. Plus, the exclusively bullish sentiment towards BAC stock sets up a perfect contrarian play. As Mr. Hargett states, “From a contrarian perspective, optimism on a strong performing stock is to be expected. Excessive optimism, however, can be a sign of a reversal in the shares.”

Anytime banks are discussed, you cannot leave out key interest rates from the equation. Frankly, the 10-year U.S. Treasury yield is the reason why investors were excited about bank stocks under President Trump. When the outspoken real estate mogul was elected, the benchmark soared all the way to the end of the year. The yield ultimately gained more than 30% between Nov. 8 and Dec. 30.

But from the beginning of 2017, the Treasury yield has fallen into a bearish trend channel. Occasional upside spikes have occurred but technical resistance is evident.

Not surprisingly, BAC stock and its rivals look like they’re stuck in limbo. The big banks were looking forward to adding premiums on their outbound loans. But if the markets can’t sustain it, those interest rates will fall, irrespective of what the U.S. Federal Reserve does.

Another problem that has got to worry Bank of America is total home ownership rate. As of the first quarter of 2017, the rate is down near historical lows. You would have to go back to the 1960s to see such sustained, depressed levels. And while housing starts have surged from the recession, that figure is fairly lagging compared to historical averages. Thus, fears remain that the well could dry up.

The Markets Are Acting Worried

Call me crazy, but that seems to imply two significant headwinds for Bank of America: declining interest rates and fewer opportunities for mortgage lending. These are also compounding challenges. Nobody’s buying homes and higher interest rates aren’t helping matters. Then the interest rate falls, which pressures some banks to do stupid things.

BAC stock, Bank of America
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Source: Source: JYE Financial, unless otherwise indicated

This goes back to one of Hargett’s arguments — too many people love BAC stock without considering the warnings.

Now, I’m not suggesting to short it. What I am saying is that we need to manage our expectations. The markets got a little excited for President Trump, which is understandable. But even he can’t move mountains without a little help.

Bank of America faces tough obstacles ahead. I don’t doubt that they can overcome them given enough time and patience. But I don’t like how gung-ho the mainstream is towards BAC stock. Some serious questions need to be answered before making too big of a move in BofA.

As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.

A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare. Tweet him at @EnomotoMedia.


Article printed from InvestorPlace Media, https://investorplace.com/2017/05/bank-of-america-corp-bac-stock-love-guts/.

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