Why You Should Cool Your Contrarian Jets on BAC Stock

When bellwethers like BAC stock crater, there’s usually a reason for it

With coronavirus cases exploding everywhere, it’s easy to forget that all outbreaks, no matter how awful they are, eventually fade. And just as it seemed that we’re heading toward the darkest hour yet, New York Governor Andrew Cuomo offered some much-needed news: it appeared that both infection and death trends have stabilized. If so, this is exactly the announcement that Bank of America (NYSE:BAC) and BAC stock needed.

Why You Should Cool Your Contrarian Jets on BAC Stock
Source: Michael Vi / Shutterstock.com

Over the last few months, I’ve been following international coronavirus cases very closely. On Feb. 10, I warned readers that the virus was unlike SARS in both scale and magnitude. At the time, I wrote that if the coronavirus crosses borders, then we’re merely at the early innings of an awful crisis. Sadly, I’ve been proven correct.

But I was worried about more than just the downfall in BAC stock. As economic bellwethers, names like BofA, JPMorgan Chase (NYSE:JPM), Citigroup (NYSE:C) and Wells Fargo (NYSE:WFC) offer a real-time indicator of true market sentiment. So far, no one likes what they’re seeing.

New York vs. Europe coronavirus case comparison
Click to Enlarge
Source: Chart by Josh Enomoto

Therefore, the stabilization of New York-based coronavirus cases was met with tremendous enthusiasm. Further, much evidence suggests that we can trust Governor Cuomo’s assessment. Initially, New York’s infection rate resembled that of select European hotspots following major community spread (typically between 50 to 100 cases).

But a few days prior to Cuomo’s statewide stay-at-home order, infections accelerated at an unprecedented magnitude. Given little choice, the governor requested all New Yorkers to shelter in place. That move was vital toward flattening the curve. Now, BAC stock and others are responding to the effectiveness of that decision.

However, I wouldn’t jump aboard BofA shares just yet.

It’s Hard to Trust BAC Stock

Personally, I commend Cuomo’s actions. Had he waited on President Trump to do something, I’m afraid New York would look far worse than it does. Of course, the highest praise belongs to the medical professionals and first responders who valiantly rose to the occasion.

Unfortunately, that doesn’t necessarily mean that bellwethers like BAC stock are out of the woods. While New York’s total infection rate has declined from prior highs, the ratio of positive Covid-19 results against total tested persons has grown worryingly high. For instance, in the 10 days between March 17 through March 26, the ratio averaged 32.2%. In the next 10-day sequence, the ratio averaged 47.3%.

In other words, among people who suspect they have Covid-19, nearly half of them are infected. Although this isn’t a tell-all indicator, it demonstrates just how quickly the coronavirus can spread in major urban areas.

But let’s assume the infection rate flattens quicker than anticipated. Would that be cause for buying BAC stock? Not necessarily.

Once the virus fades, we must still deal with the unprecedented economic damage. According to my research, this task will be easier said than done.

During our bull market years, President Trump boasted about record-high stock prices and multi-year low unemployment rates. While both are facts, the latter stat is somewhat misleading.


Click to Enlarge
Source: Chart by Josh Enomoto

Yes, unemployment did drop to 3.5% in February 2020. However, the states with the highest average GDP generally correlated with the highest unemployment rate. Conversely, states with the lowest average GDP had the lowest unemployment.

Statistically, the 25 states with the highest unemployment averaged nearly 4.1%, with an average GDP of $523 billion. The bottom 25 states averaged 2.9% unemployment with an average GDP of $287 billion. So, we’re working with an unbalanced economy.

More Tough Times Ahead for the Banks

Intuitively, you’d expect states with higher economic output to feature the lowest unemployment rates. But with our three biggest economic powerhouses – California, New York and to a lesser extent Texas – you get a different picture. Though they average a GDP of $2.14 trillion, they collectively had an unemployment rate of 3.7% in February.

To me, this signals that more of these states’ economic riches are held among fewer hands. And that goes a long way in explaining California’s surging homelessness crisis. Of course, this crisis had developed over decades of political failure in the Golden State. The coronavirus threatens to add to the raging mix.

Therefore, with so much turmoil in key regions in the U.S., I’d hold off on buying BAC stock. I’m not even sure how the big banks will handle the low-interest rate environment combined with ultra-low demand for loans. And that’s the easy problem!

A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare. As of this writing, he did not hold a position in any of the aforementioned securities.


Article printed from InvestorPlace Media, https://investorplace.com/2020/04/cool-contrarian-jets-on-bac-stock/.

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