When Donald Trump won the presidency, statisticians were caught off guard. All the signs of a catastrophic loss were plainly evident. Yet Trump pulled it off. In the same manner, Bank of America Corp (NYSE:BAC) is exceedingly difficult to forecast.
That BAC stock surged when Mr. Trump took the presidency is no surprise: The brash real estate mogul promised a less burdensome regulatory environment to reinvigorate the economy.
As a result, JPMorgan Chase & Co. (NYSE:JPM), Citigroup Inc (NYSE:C) and even lying, cheating Wells Fargo & Co (NYSE:WFC) soared. The expectation was that BofA and company would continue riding the wave of momentum.
So far this year, it hasn’t panned out that way … and it’s difficult to figure out why. Despite a torrent of criticism, President Trump has been prolific. Especially with the economy. Naturally, we expect the dollar to move higher along with key interest rates. In turn, lending institutions like Bank of America will have greater revenue potential.
And yet the future for big banking remains murky as ever.
Excellent Stats for Bank of America
First, the markets provide a picture of ambiguity. If Bank of America is the “big league” winner that everyone says it is, BAC stock should swing higher. Instead, BAC is mired in a consolidation pattern horizontal enough to make flat-Earth proponents blush. Shares are up less than 1% against their January opener. The laggard performance is a far cry from its double-digit “Trump rally.”
Compounding matters is BofA earnings. Bank of America put up impressive numbers for its first-quarter report, beating its earnings per share target by 17%. This year’s performance substantially widened the gap against its year-ago level results.
Additionally, BAC revenue “increased 7% to $22.2 billion,” while “total loans were up $21 billion, or 2%, to $914 billion.” All in all, these figures would easily elicit jealousy among the competition. But in actuality, BAC stock hardly reacted.
Adding to the mystery is the underlying economy. Unemployment is way down, at 4.5%, from the most recent March data. Relatively speaking, the real estate market is robust, with housing starts jumping more than 150% from its lows of 2009. Finally, consumer sentiment remains elevated. This implies that Americans generally feel great about the economy, and are more likely to invest or borrow money.
Therefore, it’s tempting to run out and buy boatloads of Bank of America shares. Yet I still go back to the technical performance. If BAC stock has the wind at its back, why does Wall Street not care?
It’s the Bond Market, Stupid!
The answer is found in the bond market. If key interest rates rise, this is a net positive for Bank of America and the banking industry. A big reason why banks were slow growers in prior years was because the lending margins were paper-thin.
This is no longer the case. As noted by InvestorPlace contributor Ian Bezek, the “Trump administration appears intent on giving banks the tool to amp up their loan generation and unleashing the excess reserves currently held at the Federal Reserve.”
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We are now back at the same rate immediately following the general election. What turned out to be a 39% gain in Treasury rates has instead dropped to 19%. That’s still substantial, but Bank of America is surely disappointed.
The disappointment is all the more palpable when we stack the BAC stock price against the ten-year Treasury rates.
Since Nov. 1, an 81% statistical correlation exists between BofA shares and the benchmark interest rate. In other words, where the interest rate goes, so too does Bank of America. And no matter how hawkish the U.S. Federal Reserve is, the bond market is not cooperating.
Until it does, you have to wonder about BAC. I don’t care how many policies Fed Board Chair Janet Yellen enacts … President Trump can voice his displeasure on Twitter Inc (NYSE:TWTR) to his heart’s content.
The markets are showing zero love for Bank of America despite a litany of positive data. That worries me, and that’s why I’ll be waiting before making any moves on BofA.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.
