Few market sectors were happier to see a Trump victory than financials, and Bank of America Corp (NYSE:BAC) is helping to lead the way. Right now, BAC stock is coursing 4.5% higher on more than double its already-robust volume of about 85 million shares daily.
The S&P Financial sector added more than 3% within the first hour of the session. The Financial Select Sector SPDR Fund (NYSEARCA:XLF), which holds stocks like BAC, Citigroup Inc (NYSE:C) and Berkshire Hathaway Inc. (NYSE:BRK.B), can be used as something of a proxy for this slice of the economy. The XLF rose 1.75% in the first hour of the session.
The broader S&P Financial Sector Index did even better with a gain of 3.12%.
Markets hate uncertainty, and the surprising outcome of the election at first looked like Armageddon for stocks. Futures on the Dow Jones Industrial Average plunged 800 points over night when it became clear that Donald Trump would win. Financials like Bank of America stock were a big part of that.
After all, the incoming president has demonstrated ignorance of the Federal Reserve’s role in setting interest-rate policy. It’s also clear that he has no policy yet, and often promises contradictory views on issue.
But one thing financial stocks do take Trump at his word is his pledge to do away with the regulatory structure put in place in the aftermath of the financial crisis.
The new rules and regulations have hobbled banks and taken away some of their most profitable activities. The market thinks the new administration will do everything from lifting the ban proprietary trading to ending annual stress tests. The latter would return power to the banks when it comes to capital plans. They’d be free to hike dividend hikes and enact share repurchase programs.
With its sprawling portfolio of businesses and exposure to the trading of securities, Bank of America — and by extension, BAC stock — is one of the stocks in prime position to benefit from what lies ahead.
Bank of America Stock Looked Good Before the Election, Too
It’s premature to start baking in the effects of all these potential changes to its industry. Bank of America stock might very well hold onto today’s market-beating gains, but for now, at least, it’s being driven as a trade.
We simply don’t know how a change to financial policy will affect BAC’s top and bottom lines.
Happily for long-term investors, BofA would have been a buy regardless of the outcome of the election. It’s benefiting from well established trends. As long as the new administration doesn’t derail them, shares should continue to outperform.
As more than one analyst has noted, it’s starting to dawn on the market that there is value to be had in Bank of America stock. Indeed, BAC stock is up 45% since the market’s late-June drawdown.
The firm is making strong progress on the top and bottom lines and has more cost cuts to go. At the same time, shares look cheap. The bank’s price-to-book made sense in wake of the financial crisis, but BofA is well past that now.
Bottom Line on BofA
Investors are focusing on a number of tailwinds right now. It looks like the rate-tightening cycle is finally upon us. Oil prices have stabilized. BAC continues to cut costs aggressively.
More than anything, the stock is just cheap.
Banks often have a price-to-book ratio of less than 1, but Bank of America’s was ridiculous. Now it’s closing in on a fourth straight month of gains. The P/B ratio is up to 0.72 from 0.68 just a month ago — and a midsummer low of 0.55.
BAC stock was already doing well with a number of its issues. Rates look like they’re going to go up, it didn’t get slammed by bad debt emanating from the energy sector. Joblessness is down and hiring is up.
As much as the expected regulatory changes could be bad for consumers, they will undoubtedly benefit Bank of America and its peers.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.