At the moment, few commentators are very bullish on the banking sector. Technology stocks are red-hot and threatening to print fresh all-time highs. Meanwhile, Bank of America (NYSE:BAC) stock has been languishing in a frustrating range since mid-March.
Bank of America is a mega-corporation with a market capitalization of nearly $200 billion. Yet, its stock is being ignored or hated by some market participants and social-media gurus. Does that mean it’s time for current shareholders to abandon their positions, and for prospective investors to seek greener pastures elsewhere?
A true contrarian wouldn’t give up on BAC stock so quickly. Right now, ignoring government-stimulus initiatives isn’t an investor’s wisest course of action.
Bank of America Stock Relief and Recovery
With a trailing 12-month price-to-earnings ratio, it’s not hard to see Bank of America stock as a compelling value proposition. A forward annual dividend yield of 2.85% makes a long-term position in the shares an even more attractive prospect.
But of course, a low valuation and dividend payments aren’t enough to convince informed investors to own a stock. There needs to be a catalyst, something to drive traders to bid the share price up.
Bank of America Corp. CEO Brian Moynihan offers, for your consideration, a catalyst in the form of a recovery in consumer spending. And for that, according to Moynihan at least, we can thank none other than the U.S. government.
If you recall the massive big-bank bailouts provided by the government during the financial crisis of 2008, then today’s stimulus measures shouldn’t be too surprising. The American taxpayer came to the rescue when the banks struggled then, and they’ll surely continue to underwrite the relief packages of today.
It might bring you discomfort to live in a time when consumer spending and, more broadly, the economy’s health, depends on helicopter money. But as Moynihan elaborates, the nation expects its recovery to begin with relief money, and so it shall pass:
These measures taken by Congress, by the administration and by the Fed have worked to offset the unfortunate aspects of very high unemployment — and so far, you’re not seeing delinquencies… [Y]ou’re not seeing the type of credit damage that you’d expect to see with this amount of downdraft in activity.
Still Too Big to Fail
Is the stimulus effort working? It’s too early to tell, but there are signs of life in the recovering economy. For example, as Moynihan reported, around 35% to 40% of people who requested a delay in their credit-card bills still went ahead and paid those bills anyway.
As a counterpoint to all of this, InvestorPlace contributor extraordinaire Josh Enomoto argues that the government should prioritize helping the people over financing the the big banks. That’s a great point and I highly recommend reading that article and Enomoto’s other contributions.
The argument for reform is compelling, but for the time being we have to trade the situation that’s presented to us. The U.S. Federal Reserve has fully opened the spigot on its emergency “repo” (repurchase) operations, funneling many billions of dollars into the banking system.
Even while the first round of stimulus checks are still wending their way towards America’s mailboxes, Congress is already mulling more stimulus. It’s likely that more payouts will be approved at some point, which should encourage more consumer spending.
Of course, the individual consumer won’t be the only beneficiary of government largess. Corporations like Bank of America will undoubtedly receive all the assistance largess they need, and then some.
If you don’t believe it, just rewind to 2008. That’s when America’s “too big to fail” ethos began in earnest. And discounting the government’s penchant for bailing out the fat cats simply isn’t a smart move for investors.
Enomoto’s evident distaste for government bailouts is neither wrong nor unreasonable. Investors can protest the injustice of it but still count on bailout-backed Bank of America stock to stay afloat.
As of this writing, David Moadel did not hold a position in any of the aforementioned securities.