For many investors, Bank of America (NYSE:BAC) is a confusing investment. Yes, BAC shares have gained 5% for the year, which isn’t great, but is still a positive result. However, that number alone doesn’t explain the story. Throughout most of 2018, Bank of America stock has been a choppy mess.
If we consider the non-fake news, BofA shares may have a tough road to travel throughout the Trump administration term. While President Trump often boasts about his economic accomplishments, they’re typically one-off occurrences. More critically, the markets may not have fully baked in the truly important underlying fundamentals.
Prior to his election victory, analysts feared that a Trump administration would send shockwaves to the markets. Indeed, the future market forecasted extreme volatility before the opening bell of November 9th, 2016. However, Trump’s pro-business stances appeared to win over the market.
Along with Bank of America stock, JPMorgan Chase (NYSE:JPM), Citigroup (NYSE:C), and Wells Fargo (NYSE:WFC) began climbing higher.
But the recent scandals impacting the White House show us that the markets’ original was true: Trump has always been the same. He just did a good job hiding it.
Looks Can Be Deceiving for Bank of America Stock
Granted, when the President’s former personal attorney pleads guilty to campaign finance violations and implicates the sitting president in his confession, that doesn’t exactly inspire confidence in the finance sector as a whole, nor do the range of other financial allegations against the Trump team (and the investigation is not done yet). But I also have some BofA and banking-specific headwinds with which I’m concerned.
Essentially, the current underlying economic bullishness shares something in common with our current presidential administration. Superficially, they both sound great, like a used-car salesman’s pitch. But underneath the hood lies some worrying metrics.
Last month, President Trump cheered robust second-quarter GDP figures. Certainly, at 4.1% growth, the statistic impressed even some of his critics. However, a positive blip is one thing; sustaining momentum over the long run is quite another. After all, former Presidents Obama and Bush — both of whom have been on the business end of Trump’s criticisms — produced strong quarters. And let’s not forget that Obama’s presidency started the current bull market.
What the administration’s opponents haven’t criticized firmly is the labor market. Unemployment steadily declined throughout Trump’s time in the White House — a decline that also began under President Obama. Since April of this year, the unemployment rate has not exceeded 4%.
Taking GDP and unemployment together suggests the economy truly is improving. But I recently looked at another statistic, labor force participation rate, that frankly startled me. At just under 63%, labor force participation has never recovered since the 2008 financial collapse.
That’s not to say that the economy and labor market isn’t improving. Many regions have experienced bursts in productivity and hiring. But the disjointed statistics indicates that Trump’s recovery plan isn’t working broadly as planned. In fact, if we use labor force participation as our benchmark, Main Street has gone nowhere since late 2013.
This brings me to interest rates. Generally, they’re rising, which isn’t necessarily favorable for Bank of America stock. Sure, the company earns more profits for each loan agreement they close. But those loans are steadily declining in number.
BofA Faces Tough Economic Headwinds
Another related risk factor is the labor market relative to cost of living. I believe my personal experience is similar to yours: we see people work more jobs, which leads us to assume the economy has improved. But how has it improved on a net-net basis?
For instance, a few years back, real-estate prices remained at reasonable levels. Today, I marvel that the average family can afford them. Which is to say that most people won’t borrow from banks because it’s a moot point. Why borrow for a home purchase for which a lending institution will instantly deny you?
And wage growth is another issue. Since 2009, wage growth had been steadily increasing, trying to retake pre-recession levels. Instead, they peaked in November 2016, and have been down — still below 2008 levels — ever since.
Most importantly, the fact that Trump touts the economy as one of his great accomplishments shows us that his administrations has no plan to fix these issues.
I’m not entirely sure when this factor will impact Bank of America stock. What I can tell you is that economic headwinds have already hurt the financials.
In 2017, net-interest income overtook non-interest income as the biggest revenue contributor. That’s a concern because non-interest income is income from actual banking activities, such as lending and advising. In other words, Bank of America now gets more of its money from activities other than banking.
Ultimately, this unusual trend may not be a blip. Since Q3 2017, net-interest income outpaced non-interest income. That tells me that the big banking environment is sicker than advertised, just like our political state.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.
