I think it’s fair to say we were all a bit shocked about the 2016 election results. If rumors are to be believed, even Donald Trump himself was taken aback. While the media focused on the nature of the upset, it wasn’t all bad news. Beleaguered Bank of America Corp (NYSE:BAC) finally got something positive cooking, ending 2016 up nearly 37%.
That’s a stunning turnaround for BAC, which started last year with a 14% loss for the month of January. The President-elect’s campaign message of a less burdensome regulatory environment paved the way for bullishness towards BAC stock.
Of course, BofA wasn’t the only beneficiary. The other members of the “Big Four” — JPMorgan Chase & Co. (NYSE:JPM), Citigroup Inc (NYSE:C) and even the controversial Wells Fargo & Co (NYSE:WFC) — all piggybacked off the “Trump rally.”
The bullish thesis towards BAC stock and the rest of the financial services complex is easy to understand. Fewer regulations means that Bank of America can dial up the risk and get more aggressive. Furthermore, the U.S. Federal Reserve has trended towards a hawkish monetary policy for quite some time. This incentivizes banks to loan out money, for which BofA and others will receive a greater margin.
This all sounds wonderful … but why hasn’t this resulted in sustained optimism? If you look at things a little more closely, BAC has only jumped 0.35% since Dec. 8. It’s as if the Trump rally was exactly good for only one month.
Should investors start to worry?
BAC Under “The Donald”
I’ll say this: If you’ve taken a speculative bet on Bank of America shares, now would be a good time to consider taking some profits off the table. Although the fundamentals of a less burdensome regulatory environment is a tailwind, I have concerns about execution.
Let’s take a look at an unrelated, but extremely relevant news item. Last week, the Senate took the first step towards repealing the Affordable Care Act, colloquially known as “Obamacare.” As expected, thousands of people across the nation took to the streets to protest. And it’s not just the fact that the fate of 20 million Americans insured under Obamacare hangs tenuously. No one has any idea of what will replace it.
Check that — that’s not entirely accurate. When asked about the reception of a new healthcare plan, Donald Trump replied, “I think we will get approval. I won’t tell you how, but we will get approval.”
So there you have it: BAC and the rest of the financial complex are going to be great again because Donald Trump said so. What more provenance do you need? Bank of America is going to be the best bank ever. They’ll have the least amount of problems. In fact, they won’t have any problems. The American people are going to be so proud of BofA … just you wait!
For those that prefer a little more explanation, you might be out of luck. Given this uncertainty, I don’t think it hurts at all to reconsider your exposure to BAC stock.
Questionable Fundamentals for BofA
Those that still ardently believe in the big banks may want to know how the rest of the industry is holding up. Of significant concern are the institutions that fall outside the Big Four. As an example, Nationstar Mortgage Holdings Inc (NYSE:NSM) took a good-sized beating last Friday and on Monday, slipping more than 10% over the last three trades. This volatility contradicts notions that our economy is steadily improving.
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It’s easy to see why the financial services sector is not perfectly in tune if you look at the situation topically. Yes, banks will benefit from rising key interest rates, but only if they’re willing borrowers. Here’s the thing: New one family houses sold in the U.S. average 652,000 units since 1963.
At last count, the figure was 592,000 and throughout virtually all of 2016, it averaged 563,000. In other words, we still have a long ways to go.
Thus, rising rates are a double-edged sword for BAC stock. Sure, some divisions like business loans may see upticks, while home mortgages aren’t likely to improve unless sentiment changes dramatically. If the housing market wasn’t all that great to begin with at record-low interest rates, higher rates would logically exacerbate the problem. And if the repeal of Obamacare is any indication, we’re not going to get much transparency from the new administration.
Judging by the markets, BofA shareholders are feeling pretty antsy about the political transition. The populace and pro-business message sounded amazing on the campaign trail. However, in reality, the execution is much messier than anticipated. That might come back to haunt BAC, which has benefited from strong words, but not yet deeds.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.
