“Winning” may be President Trump’s motto, but Bank of America (NYSE:BAC) isn’t feeling the warm and fuzzies. Last year sparked a stellar performance in BAC stock, with shares returning nearly 33% for jubilant contrarians. Though Trump had previously caused concerns, his business acumen apparently boosted market confidence once in office.
And to be fair, Bank of America stock is still up in positive territory. Year-to-date, shares have gained 4.4%. But investors have reason for concern. The vanilla benchmark SPDR S&P 500 ETF (NYSE:SPY) is right on the cusp of double-digit territory. Therefore, blindly picking a basket of blue chips has netted stronger returns than jumping on BAC.
More critically, BAC stock is really a bellwether investment. As a member of the “Big Four,” which includes JPMorgan Chase (NYSE:JPM), Citigroup (NYSE:C), and Wells Fargo (NYSE:WFC), BofA demands significant attention. Simply put, if customers aren’t knocking on their doors for loans and other financial services, the economy isn’t that great.
Herein lies the problem. I don’t see enough fundamental metrics underlining Bank of America stock to suggest that our economy is healthy. Rather, it’s “healthy-ish.” Here are three reasons why I’m passing on BAC:
Real Estate presents Real Problems for BAC stock
Everyone knows that real-estate prices have gone bonkers. I could bore you with a series of charts and graphs demonstrating this simple fact. Just research available homes in major metropolitan areas and your brain will melt.
But one statistic I’d like to draw your attention to is the California house price index. It peaked in the third quarter of 2006, with a score of 645.3. At the most recent reading, we’re looking at a score of 655.91. After 12 years, the index jumped 1.6% higher than the level in which the real-estate market imploded.
Sure, we’re making more money, but considering inflation, real wages haven’t improved that much. Especially in places like southern California, costs have greatly exceeded many families’ comfort margins. That’s why people are leaving the Golden State in droves.
How does this relate to BAC stock? Real estate is no longer affordable under the current paradigm. The evidence is all around us. CNBC published a report earlier in July declaring that “Homeownership eludes millions of millennials.”
If a new generation of home buyers aren’t replacing the older generation, that’s net negative for Bank of America stock.
Here’s something else to chew on: Millennials are the largest generation in the U.S. workforce! Therefore, we have an upside demographic crisis with our housing situation. This trend will ultimately kill BAC stock unless we can reverse it.
Financials for BAC Stock Lack Holistic Strength
Understandably, a new presidential administration offers some level of excitement for the markets. For all his controversies, Trump has at least some business cred, which boosted BAC stock.
But Trump’s boasting of the economy having substantively improved lacks evidence. Yes, BAC has improved its financial standing from the pit of the Great Recession. Nevertheless, much of its earnings growth is coming from cutting expenses, and not on lending and financial services.
If you look at the longer-term revenue stream, BofA generates sales growth through interest income, or interest earned on its assets. Essentially, the bank makes money for existing. But the real growth engine should be lending activities, and other financial services.
Here, Bank of America stock demonstrates its vulnerability. From 2014 to 2017, BofA’s non-interest income slipped 5.4%. This is the second-worst ranking among the Big Four, only ahead of Citigroup’s 9% loss.
But this is also a broader concern. Banking king JPMorgan lost 3.8% in non-interest income over the same time frame. Wells Fargo shed the least, but it still gave up 2.3%.
Like I said, we’re not in a healthy economy, but a healthy-ish one.
Bank of America Has Political Risk
This is an obvious one, but it’s still worth considering. Despite its name, BofA has international business interests. Management can’t pretend that they’re not impacted by the antics in Washington.
With the China tariffs, we’re going to feel the impact as the Chinese government likely ramps up their response. Worse yet, I don’t see any evidence that will find a meaningful resolution in the nearer term. Trump has always wanted things done his way. On the other hand, China can’t show weakness to the international community.
We’re bringing a gun to a knife fight, so that’s the good news. The bad news is that we’re going to get stabbed. But that could pose serious problems for BAC stock in a healthy-ish economy.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.
