U.S. President Donald Trump is having a really rough time in the White House. Last week, after he made good on the controversial immigration ban, Twitter Inc (NYSE:TWTR) launched an initiative resisting the executive order. You know things are bad for “The Donald” when even Twitter has had enough! But one mandate investors are really excited about is “Core Principles For Regulating The United States Financial System.”
It’s an eloquently titled executive order, considering the man signing the document. Perhaps a more appropriate title is, “Why Dodd-Frank Sucks, and Everyone Knows It!” Or “This is the Greatest, Most Luxurious Deregulation, the Best Ever!” Either way, the President has promised that we’re going to be so proud of our country in a few years. And Bank of America Corp (NYSE:BAC) will be holding Trump to his word.
BAC Stock Isn’t So Impressive
For much of the post-Great Recession period, Bank of America stock was the perennial laggard. Encumbered with the embarrassing weight of the housing crisis fiasco, people generally did not trust BofA.
Furthermore, there were the costs associated with litigation resulting from the scandal. In the markets, BAC stock simply didn’t perform to the expectations of most investors. There were plenty of head-fakes, and plenty more disappointments.
I’m not picking on Bank of America stock; these are just the facts. Supporters of BAC stock will often point to the 101% return achieved in 2012. However, that obfuscates from the fact that in the year prior, BofA hemorrhaged almost 61% of its market value. Let’s do a little math here: If you take a 50% loss on your investment, you need a 100% profit to break even. If you take a 60% loss, your breakeven is 150%!
It’s something that many investors don’t realize.
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That 10% margin between a 50% and 60% loss is magnified tremendously. So while the volatility of BAC stock makes it an ideal trading platform, it’s only relative to the entry point. Get it wrong, and Bank of America stock can hurt you.
And yes, BofA hurt a lot of folks, especially considering that they could have parked their money someplace else. True, if you held onto BAC stock since the beginning of 2010, you would have pocketed a 52% return. However, if you had done the same for big bank laggard Citigroup Inc (NYSE:C), you actually would have netted nearly 69%.
However, it’s the big boys that did the most damage. JPMorgan Chase & Co. (NYSE:JPM) brought home 138%, while Wells Fargo & Co (NYSE:WFC) snagged 142%. Bottom line — losses matter, and by extension, so too does money management.
Dodd-Frank Repeal Won’t Affect BAC Stock That Much
Of course, BAC wants to put all the negatives of the recent past behind it. With Donald Trump leading the show, their hopes are seemingly justified. Whether you agree with the Dodd-Frank Act, almost everyone will admit our financial system became more convoluted. And the act has been an arguably unnecessary thorn on the side for Bank of America stock.
For the consumer, the most conspicuous impact is in free checking. In the post Dodd-Frank era, that term has become the Loch Ness Monster of big banking. Prior to the summer of 2010, BofA offered free checking. Afterwards, there was a fee of $8.95, which then increased to $12 less than a year later. As of now, it’s still $12.
Logically speaking, a repeal of Dodd-Frank should make BofA more competitive as they can dedicate more resources to attracting clients as opposed to paying lawyers. That also should make BAC stock enticing for investors that have previously been taken on a wild ride. But I also think that a word of caution is necessary.
If the repeal is going to help anybody, it’s regional banks. Since they don’t have the resources of a BofA, the net benefit is exponentially larger. Also, I wouldn’t be going out on a limb to say that people prefer community banks. Maybe it has something to do with lingering trust issues with major institutions.
Let’s also keep in mind that Bank of America stock is the worst of the “Big Four.” Just because it enjoyed a two-month rally doesn’t change that fact. Until BAC stock demonstrably proves itself, taking profits off the table isn’t such a bad idea.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.
