Bank of America Corp (NYSE:BAC) was already on its heels Monday morning as markets opened with a thud. BAC stock started the day down more than 2%, helping lead other financials such as U.S. Bancorp (NYSE:USB) and JPMorgan Chase & Co. (NYSE:JPM) lower.
The seeming cause was broad-market reaction to the failure of the American Health Care Act, which knocked down financials, steel stocks and other so-called “Trump plays.” Investors now appear worried that other GOP action items — such as pulling down regulations in the financial sector — might not be as much of a guarantee as the market thought.
However, the market — and BAC stock — are showing resilience, and not for the first time this year. In fact, Bank of America by midday had pared those losses to less than 1%.
A couple of things seem to be working in Bank of America’s favor right now on a chart basis. For one, a line of price support around the mid-$22s — which shares battled for months after their initial rise from the election through mid-December — has held strong for the second straight challenge this month.
Moreover, BAC stock is testing the bottom end of its Relative Strength Index (RSI), with shares bouncing back upon touching the “extremely oversold” reading at 30.
But investors also seem to be providing support based on a strong fundamental case that the market seems to occasionally forget on its down days.
The Bull Case for BAC Stock Is Being Sold … But Not for Long
While shares are up nearly 40% since the November elections on Trump-mania, that merely brought Bank of America more in line with the rest of the market. BAC still trades at just 11 time forward earnings forecasts, and the company still trades to a slight discount to book — not the excessive bargains we saw before this multimonth rally, but still much better than what most of the rest of the market is offering. It’s certainly better than the P/B ratios of large rivals such as JPM (1.4) and Wells Fargo & Co (NYSE:WFC, 1.6).
And let’s not forget the very real driver that Wall Street suddenly forgot about once it occurred.
Earlier this month, the Federal Reserve hiked the Fed funds rate by a quarter-point — its third increase in 15 months. In general, higher interest rates bode well for bank stocks as it tends to widen the spread between their borrowing costs and what they charges others to borrow.
But Bank of America’s specific positioning is well-known at this point: CEO Brian Moynihan has said that a mere 25-basis-point rate hike could result in an extra $600 million in profits each quarter.
The Fed is also expected to raise rates twice more this year. It’s not nearly as sure a thing as March’s hike seemed, but many pros think we’ll at least get one of those rate increases.
Yet BAC stock is now off more than 10% since the Federal Reserve’s announcement, and in pretty straight order. That’s nowhere near the magnitude of most of the other stocks — the Financial Select Sector SPDR Fund (NYSEARCA:XLF) is only off about 6% in that time.
Wall Street has taken “buy the rumor, sell the news” to an extreme with BofA, and buyers who wanted Bank of America to cool off before jumping in seem to enter little by little on each of these panic days.
BAC looks likelier to catch its wind once Wall Street remembers that financial deregulation is much likelier to meet success than the AHCA ever was, and when it does, the stock should rebound.
Because there’s no real timetable yet, though, investors would be better served going long via calls than direct buys.
As of this writing, Robert Martin did not hold a position in any of the aforementioned securities.