In order to save you time, I’m going to be upfront. If you’re emotionally and financially vested in Bank of America (NYSE:BAC), you may want to want to turn away. Based on available evidence, I don’t expect much positivity from the BAC stock price in the near to intermediate term.
First, I’m going to address the obvious. Over the last several months, the ongoing U.S.-China trade war has taken its toll on the broader economy. While it appeared that both sides were willing to hash out a deal, President Donald Trump may have quashed that sentiment.
Speaking in front of the United Nations General Assembly, Trump bluntly stated he would not accept a “bad deal.” Although Trump is notorious for sharp rhetoric, this nevertheless poses concern for Bank of America stock. That’s because after making its message known, the U.S. may have nothing to gain from prolonging the conflict.
Moreover, the trade war has hurt confidence among small businesses, and forced larger ones to make adjustments. Additionally, the tit-for-tat tariffs have negatively impacted the global economy. Of course, none of these things benefit the BAC stock price.
Second, even most fund managers are sounding the recession alarm. According to Bank of America’s survey on this profession, fears about an incoming downturn are the highest since 2009. Interestingly, while most fund managers believe the trade war represents the biggest negative catalyst, they don’t foresee a resolution until at least right before the 2020 election.
Ironically, it’s the solution for this potentially imminent crisis that has many folks worried about Bank of America stock — aggressive calls for fiscal stimulus.
BAC Stock Risks Getting Squeezed
In August, I said it was time to “get real” and sell shares. One of the reasons I felt so strongly about this is the context of the bank’s revenue picture. Increasingly, net-interest income, or income generated from interest-bearing assets minus their associated liabilities, represents a greater share of total revenue.
Fundamentally, I believe this is a small, but significant clue that all is not right with the BAC stock price. In a truly healthy, robust economy, you want to see non-interest income (income from activities or services) be the driver.
Unfortunately, whether we’re talking broadly about the U.S. or Bank of America specifically, that’s not going to happen. For example, the Trump administration is entertaining the idea of a flavored-vaping ban, which indirectly clouds marijuana legalization initiatives. Because of politics, the country is throwing away viable small-business revenue streams.
And Bank of America isn’t helping itself out. Last year, the bank decided it won’t lend money to manufacturers of civilian but military-inspired firearms. That’s another revenue-making opportunity that management needlessly tossed.
But where BAC stock gets worrisome is the dynamics in the bond market. Currently, we’re already near record-low yields. Yet clearly agitated with economic and market performances, Trump has recently called for below-zero interest rates.
Pointedly, Reuters noted that such action would hurt savers. Well, what’s a bank then? As it is, BAC clearly has trouble pushing loans on consumers (this is part of non-interest income). But with ultra-low or negative rates, whatever loans successfully pushed will be far less profitable.
Combined with dubious moral compasses, BAC stock faces pressure from all angles. It’s not about whether I like Bank of America or not. Rather, it’s just a risky place to park your money at this juncture.
Technicals Confirm the Fundamentals
Although the evidence overwhelmingly supports a cautious approach for Bank of America stock, even hard data ultimately doesn’t matter. As we all know, the markets can stay irrational longer than we can stay solvent.
Nevertheless, I find it interesting that the price action for BAC stock is confirming the bearish narrative. Yes, shares are up over 18% year-to-date, even including Tuesday’s sizable dip. Since the end of January, however, Bank of America stock has gyrated in a horizontal trend channel.
Ordinarily, many investors may interpret this circumstance as a neutral trend. Against the broader context, though, I believe it’s net negative for the BAC stock price. That’s because the bulls have clearly attempted multiple times to take shares higher, yet failed each time.
How do I interpret this situation? BAC doesn’t have a catalyst. Moreover, dovish fiscal stimulus may briefly help shares. But remember, this is a bank. Aggressive fiscal policies can only hurt savers and lenders.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.
