I have a tremendous amount of respect for those that routinely cover Bank of America Corp (NYSE:BAC). It’s a tough company to crack, especially at this juncture. You see, President Donald Trump’s historic election victory set the stage for bullishness in BofA and its big banking brothers, as did a stream of interest-rate hikes from the Federal Reserve. And yet for much of this year, we’ve seen a frustrating amount of sideways consolidation in BAC stock.
In fact, thanks to Wall Street’s negative opinion of reports from Wells Fargo & Co. (NYSE:WFC) and JPMorgan Chase & Co. (NYSE:JPM), Bank of America shares are off more than 2% on Friday in sympathy, meaning the giant bank is underperforming the S&P 500 (8.5% to 9.5%) for the year-to-date.
It looked like we were off to the races again. BofA — along with every major banking institution — passed the Federal Reserve’s annual stress tests. That sent BAC, JPM, WFC, Citigroup Inc (NYSE:C) and the dozens of other scrutinized banks higher a couple weeks ago as Wall Street welcomed the encouraging news — and the green lights on dividend hikes and buyback programs.
This pointed to a classic bullish setup, and BAC stock specifically seemed like a no-brainer. If you needed more convincing, you could take some advice from Warren Buffett, urged InvestorPlace feature writer James Brumley. The Oracle of Omaha, after all, made a big move on Bank of America.
However, BofA has some serious problems — and that’s outside of the negativity foreshadowed by its Big Bank brethren today.
Interest Rates
Wait. Interest rates are supposed to be a catalyst for BAC stock, right?
During the campaign, Trump frequently lashed out at Fed chair Janet Yellen, accusing her (among other things) of artificially keeping interest rates low. However, the Fed has pushed out a pair of rate hikes so far in 2017, to go along with one in late 2016, and one or two more aren’t out of the question this year.
And higher rates are a net positive for BofA, all other things being equal. They tend to boost bank stocks by raising the cost of short-term lending, and in turn, banks get a boost to their margins.
But a funny thing happened.
10-year Treasuries have actually been on the decline since Trump got into office. While the official fed funds rate is going higher, actual interest rates aren’t following suit. That threatens to mute one of the main drivers of optimism for BAC stock in late 2016 and throughout 2017.
Is Gold Giving Us a Warning?
Gold is considered a safe haven for many investors. The mainstream can talk all they want about the yellow metal being a “barbaric relic.” But like the old adage that there are no atheists in a foxhole, when the smelly stuff hits the fan, everyone is a gold bug.
Geopolitically, the smelly stuff abounds. Yet gold has been unusually quiet during these tumultuous times. The downside volatility that we’ve witnessed in gold could be the result of either a trading mistake or market manipulation, as reported by Bloomberg.
But once the dust settles, gold does appear primed for either a breakout or a breakdown. If interest rates continue to lag, gold might soak up investment capital meant for BAC stock and other banks. That specter rises all the more with events like the president’s tough talk on North Korea and heightened impeachment whispers.
Gold is no friend of Bank of America, however, because it sucks money out of circulation and into a non-producing asset. It’s not a critical factor, but it’s still one to watch before jumping too bullishly into bank stocks.
Can BAC Stock Benefit From a Berserk Housing Market?
Obviously, one of the reasons why people need major financial institutions like BofA is to make “bigly” purchases like homes. I’m a strong believer in BofA on that merit, but only if the housing market is reasonable.
As of May 2017, the median sales price for new houses sold is nearly $346,000. In May 2012, the median price was a little over $239,000. Are you telling me that in just five years, Americans now have over $100,000 burning a hole in their wallets?
Something doesn’t smell right. While home prices in several real estate markets have skyrocketed, the average wage in the U.S. has only increased 12%. And the average wage today is nowhere near adequate enough to own a $346,000 home.
It is enough for a $239,000 home, but just barely.
Bottom Line
I agree with several analysts that BAC stock looks attractive right now, especially as a quick trade. The bullish position is compelling enough.
But I have reasonable concerns for Bank of America in the intermediate-term. Interest rates are infuriatingly stubborn, and the world is on increasingly shaky ground.
None of this is to say that BofA is on the verge of collapse, but it could be a waste of your money for at least the next year — and that’s reason enough to move away.
As of this writing, Josh Enomoto was long gold.
