Like most of its peers, Bank of America Corp (NYSE:BAC) reported mixed results for the most recent quarter. Some things were good, while others were bad. After a dip in early morning trade, BAC stock has recovered and is now about flat on the day.
Overall, the market is choosing to look at Bank of America as an interest rate play. The higher interest rates go, the more money BofA makes, and the higher BAC stock goes.
To this end, BAC investors are unimpressed. BofA’s net interest income under-performed in the quarter. That’s a sign of the times. The yield curve has flattened as investors are exercising caution about future inflation expectations.
Is this caution warranted, or are interest rates heading higher and taking BAC stock with them?
Let’s take a closer look.
What’s Up With Interest Rates?
When Trump got elected, BAC stock ran higher as investors braced for a new era of higher inflation and higher interest rates. But, that so-called Reflation Trade has run its course. Its now more than eight months later and not much has happened in the way of inflation growth.
The job market has gotten tighter and unemployment is near historic lows. But, wage growth has failed to pick up. Meanwhile, consumer price growth remains equally depressed.
Traditional economic theory says that the gradual tightening of the labor market will eventually spill into wage growth and inflation. Once inflation picks up to the 2% mark the Fed is looking for, there will be a clear path for rate hikes. As such, traditional thinking is that it’s not a matter of “if,” but rather a matter of “when” higher interest rates will come. Thus, BAC stock going up isn’t a matter of “if,” but rather a matter of “when.”
It has becoming increasingly clear, though, that such traditional economic theory is old-school and may not be relevant anymore. Bank of America Merrill Lynch strategist Michael Hartnett said in a very interesting note last Wednesday that technology has flipped this traditional way of thinking on its head.
According to Hartnett, the rise of revolutionary technologies like automation and artificial intelligence are killing wage growth. These new technologies are forcing companies to make cost-cutting more important than risk-taking. When companies emphasize cost-cutting, wages get stuck in neutral because payroll is a big chunk of a company’s operating costs.
Moreover, Hartnett subscribes to the theory floating around the market that Amazon.com, Inc. (NASDAQ:AMZN) is killing inflation all by itself. He calls it the “Amazonification of Main Street.” Essentially, the theory goes that, despite a full economy, inflation may fail to kick in because Amazon continues to push consumer prices lower.
When looking from a broad viewpoint, Hartnett’s theory makes a lot of sense. That’s bad news for BAC stock because it means a lower-for-longer interest rate environment.
While the job market is full right now, how much longer can it really stay that way with job-replacing technology coming to the forefront? It seems that on every earnings call these days, management is talking about taking costs out of the system, especially in the retail industry. The easiest way to take costs out of the system is to fire employees and replace them with more cost-efficient automated technologies.
Even companies that don’t want to do this might be forced to because of the Amazonification Hartnett described. Amazon has created such a large and disruptive commerce platform that its low prices are pressuring other retailers to either keep up or declare bankruptcy. Retail bankruptcies are as high as they’ve been since the Recession. Its no coincidence that AMZN stock is simultaneously making new all-time highs.
So, Amazon is keeping consumer prices low now, and will continue to do so into the foreseeable future. Meanwhile, job-replacing technologies are about to wipe out a big chunk of the labor market. That isn’t the sort of combo that leads to higher interest rates.
And, its actually the sort of combo that could be quite crippling to BofA.
Bottom Line on BAC Stock
The market is looking at BAC stock as an interest rate play. With Amazon keeping prices low and job-replacing technologies threatening the labor market, investors should brace for a lower-for-longer interest rate environment. That means selling the interest-rate-dependent BAC stock.
As of this writing, Luke Lango was long AMZN.
