Time to Get Real and Sell Bank of America Stock

BAC had a good run on the promise of economic recovery, but current pressures are too much to handle

For quite some time, the major financial institutions, such as Bank of America (NYSE:BAC), JP Morgan (NYSE:JPM), Citigroup (NYSE:C) and Wells Fargo (NYSE:WFC), have been questionable investments. For example, while the BAC stock price has offered a powerful return since President Donald Trump won the 2016 election, fundamentally, BofA has not forwarded a convincing narrative.

With These Headwinds, It's Long Past Time to Bail on BAC Stock
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One of the biggest concerns that I’ve had about Bank of America stock is its revenue allocation. Basically, banking firms have two types of revenue: net-interest income and non-interest income. From a textbook standpoint, the former metric is the difference between revenue from a bank’s interest-bearing assets versus its expenses associated with interest-bearing liabilities.

In human terms, a home mortgage is an asset to the bank, while a customer deposit is a liability. The difference between the former’s interest-bearing revenue and the latter’s interest-bearing expense is net-interest income.

On the other hand, non-interest income is the revenue the company generates from anything else: in other words, from actually doing something. This includes anything from consulting to advisory activities, and yes, selling you that contract of indentured servitude called a mortgage. For me to have confidence in the long-term potential of the BAC stock price, a rising non-interest income is critical.

While core metrics have improved overall for the financial sector during President Trump’s administration, one thing remains amiss: net-interest income, or balance sheet income, is representing a greater share of total revenues than non-interest income. That’s the case for the underlying business of Bank of America stock, along with its peers.

Thus, while the president has often bragged about the burgeoning economy, the fundamentals for BAC stock tell a different story. And with a recession possibly around the corner, I just don’t see this as a smart investment right now.

Don’t Fight the Tape With BAC Stock

Normally, you’re incentivized to string together whatever arguments you can supporting Bank of America stock and its ilk. You can’t invest in the U.S. as an entire nation, per say. However, buying shares of BofA or any of the other “big four” is as close as you can get.

Essentially, BAC stock is part of a core group of economic bellwether stocks. Wherever it goes, that’s usually where the economy heads. Unfortunately, I find that a huge problem because BofA represents a frightening parallel to our nation.

Like the country as a whole, we have been getting fat off the headline numbers. For the economy, it’s esoteric metrics like GDP. For BofA, it’s the fast-charging BAC stock price since Trump’s electoral victory.

However, the fundamentals for both are sour. Our national debt is skyrocketing every year to astonishing and likely intractable levels. In terms of BofA, the rising proportion of net-interest income indicates that it hasn’t made substantive progress. Instead, Bank of America stock only looks good on paper. In reality, there’s less rubber hitting fewer roads.

Stated differently, people aren’t taking out mortgages in droves, which would lift non-interest income. Nor are they starting new businesses, which would also drive up this revenue category.

And that’s without a recession. With it, I just don’t see the BAC stock price moving upward. What I mentioned about mortgages and business generation will only be exacerbated in a downturn. Moreover, notice that gold prices have consistently hit new multi-year highs recently.

If people are buying precious metals, that essentially means they’re not circulating dollars. Absent this circulation, the prospects for Bank of America stock look dim due to this deflationary implication.

Bank of America Stock Is Heavily Exposed in a Recession

There’s nothing like financial pain to bring clarity to one’s thoughts. Unfortunately for BAC stock, I think that’s exactly what is happening now in the markets.

It was just over a decade ago that the major indices melted down. From there, we saw a rapid unraveling of housing prices. Unemployment benefits requests pressured individual states’ resources. Working folks everywhere may have put this pain behind them but they certainly haven’t forgotten.

That’s very worrisome for BofA. Despite the Federal Reserve’s efforts toward cutting benchmark interest rates, no one’s going to bite. Why would anyone risk buying a home right now when the memories of the last housing crisis are still fresh? And there’s no way someone’s going to risk their life savings to start a business, not with the way our economy is acting.

Finally, this low interest rate environment is only beneficial for the borrower (who isn’t even borrowing). So, no matter where you look, BofA faces pressure. That’s why I’m avoiding BAC stock like the plague.

As of this writing, Josh Enomoto is long gold.

Article printed from InvestorPlace Media, https://investorplace.com/2019/08/time-to-get-real-and-sell-bank-of-america-stock/.

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