A strong economy has been at the root of the S&P 500’s 10% climb since April, while weekly jobless claims dropped to a 49-year low in August. But good fundamentals could be a double-edged sword. See, the stronger the economy looks, the more reason the U.S. Federal Reserve has to continue hiking interest rates. The next Fed policy meeting kicks off on Sept. 25, and a hike to borrowing costs is largely expected. But banking stocks, including leader Bank of America (NYSE:BAC) offer a great hedge against rising interest rates. While they could very well put a damper on the growth that’s spurred them (and stock gains), stocks like Bank of America stock naturally benefit from higher borrowing costs.
In the most recent quarter, loans increased 7% to $281 billion, while investment loans increased the same percentage to $161 billion. If each loan brings in a little more coin through higher rates, that should help the company’s continued growth.
Of course, the bull case for BAC stock isn’t only predicated on interest rates — I just personally think that it’s a trend that makes BofA a great addition to just about anyone’s portfolio.
The Other Perks to Bank of America Stock
It’s always crucial to spread around risk. But BAC stock also has long boasted a rock-solid balance sheet, which is great for weathering tough times. At the end of last year, the company had over $700 billion in cash and cash equivalents.
According to chief financial officer Paul Donofrio, BofA is working to cut any fat from its business, hence the fact that the company is slated to turn around 4% sales growth and 9% growth on the bottom line looking forward. Another tip of the hat to management comes from the fact that Bank of America has topped Wall Street’s consensus in each of the last four quarters.
Now, Bank of America stock is hardly a rocket. So far this year, it has simply moved sideways. Still, shares have been slowly and surely recovering over the last decade and, barring another financial crash, I think they’re set to maintain that trend. Sideways isn’t terrible when the company is handing out a quarterly payout yielding just shy of 2%.
Add it all up, and BAC stock isn’t as shiny or sizzling as many tech companies that make headlines daily, but that’s precisely what makes it a good investment. It’s a good balance to those riskier bets, especially considering it can currently act as a hedge against rising interest rates and the affect they’re sure to have on the economy and stock market.
As of this writing, Robert Martin did not hold a position in any of the aforementioned securities.