Bank of America (NYSE:BAC) as a tradable security just can’t seem to get it going. Frustratingly, BAC stock has moved sideways for about 18 months now. Shares are at levels not seen since early December 2017.
All the while, Bank of America stock has consistently looked cheap. Currently, it trades at less than 11x 2019 consensus earnings-per-share estimates. Price-to-book is just 1.1x, near the lowest level seen in the past year, save for the market-driven dip in December.
And I continue to think that the BAC stock price is too cheap, as I’ve argued for some time now, most recently in March. But as external risks mount, particularly after a mixed earnings report for the first quarter of 2019, a rally make take some time to stage.
For the most part, BofA is doing what it should, and what it needs to. The problem is that nothing else seems to be cooperating, especially the aforementioned external risks. Given that those threats aren’t going anywhere, the same well might be true for the BAC stock price.
Risks Mount for Bank of America Stock
A core problem for BAC is not just that it’s facing a number of risks, but that they’re seemingly interconnected. That’s been an issue of late, as Bank of America stock has fallen over 9% in just 14 trading sessions.
The obvious culprit for both BofA and the broader markets is rising fear of the trade war. A prolonged battle between the U.S. and China could lead to slower economic growth, which potentially hurts BofA profits.
But it’s not even quite that simple. A trade war in theory could drive higher inflation, not just lower growth. That would lead the Federal Reserve to potentially cut rates. A rate pause already sent BAC stock tumbling back in March. Cuts would be even worse and would reverse the benefits of rising rates that have helped earnings and the Bank of America stock price since the 2016 elections.
Political risk is a factor as well. BAC stock was one of the big winners of that election, gaining some 50% in a matter of months. The thesis then relied partially on a Republican-controlled government rolling back Dodd-Frank and other banking regulations.
That narrative hasn’t quite played out, even though the law was altered last year. But the fear now is that regulation will increase under a potentially Democrat-controlled government. That’s particularly worrisome if trade war difficulties hit the economy and lower President Donald Trump’s re-election prospects.
Bank stocks like BAC are notoriously cyclical; they will rise and fall in line with macroeconomic expectations. What’s happening now, however, is that the economic exposure of the equity is being amplified by political exposure at home and abroad. Therefore, it’s little surprise that BofA has been so volatile and unable to maintain a rally.
Where Does BAC Stock Go from Here?
I continue to recommend BAC stock, along with JPMorgan Chase (NYSE:JPM), for the long run. But it’s not hard to wonder whether the sideways trading in both securities might continue for some time. As InvestorPlace contributor Bret Kenwell pointed out last month, JPM has faced similar difficulties in terms of gaining traction.
Because the question here is, what really changes? The trade war has no solution on the horizon. The next presidential election is almost 18 months away. Anxiety over a coming recession won’t fade until the recession actually arrives. BAC stock is going to be grinding through external fears for a while.
That’s true for all bank stocks, admittedly. But Citigroup (NYSE:C) — which actually has been the star among big banks in 2019 — and Wells Fargo (NYSE:WFC) at least offer turnaround stories. BAC and JPM are performing well relative to their modest expectations. Yield-focused investors could look at Canadian banks like The Toronto-Dominion Bank (NYSE:TD) and Bank of Montreal (NYSE:BMO), though those banks have their own real estate and mortgage-loan risks.
Even with BAC stock back near $28, you’ve got to wonder if a discount is coming over the next 12 months. BofA does trade only modestly above book value, but it traded below book for years after the crisis. Its 9x forward earnings is cheap, but not necessarily dramatically so if rates are cut again and/or the economy finally slows down.
Long-term, I still like BAC. I wouldn’t blame investors for simply riding out the noise until shares rally again. But it’s becoming increasingly likely that those long-term investors will need to have quite a bit of short-term patience.
As of this writing, Vince Martin has no positions in any securities.
