The Fed May Not Have an Answer for Bank of America Stock

From an arbitrarily defined framework, an initial glance at Bank of America (NYSE:BAC) may foster encouragement, not despair. Since its closing low of this year on March 23, BAC stock is up more than 44%. But such a perspective belies the real fundamental pain that’s rippling throughout the economy. If you’re not the type to take risky bets, you may just want to wait on Bank of America.

Bank of America logo on top of a retail office building
Source: 4kclips /

Don’t get me wrong – I’m not recommending that you sell shares (although now that I think about it, I can see how that would appeal to speculators). Merely, I’m looking at big picture data, which doesn’t support a convincing bullish argument for Bank of America stock. Primarily, the business environment – particularly in the consumer retail sector – is a disaster. For instance, household names like JCPenney (OTCMKTS:JCPNQ) declared bankruptcy this year.

Many more will follow and we’re not just talking about previously embattled organizations. According to the Chicago Tribune, small businesses “are quietly dying by the thousands during the coronavirus pandemic.” According to data from Yelp (NYSE:YELP), “more than 80,000 businesses permanently shuttered from March 1 to July 25. About 60,000 were local businesses, or firms with fewer than five locations.”

And that could just be the tip of the iceberg. According to a report from April, “7.5 million small businesses are at risk of closing.” Granted, this was from months ago during the peak of the initial novel coronavirus wave. Since then, the economic outlook has improved.

But simply improving is not good enough. We need a substantive, credible path to recovery in order for Bank of America stock to thrive. And that’s where the situation gets tricky.

Stimulus May Not Be Enough for BAC Stock

To be fair, the U.S. has faced several economic crises and other calamitous events. In the past two decades or so, we’ve suffered two significant stock market crashes, a housing crisis, a paradigm-shattering terrorist attack, and a prolonged recession. Each time, we’ve come back stronger.

Given the highly charged political climate we’ve created, it would be almost un-American to claim that this time is different. But in some ways, we shouldn’t expect history to repeat itself so favorably.

Back during the Ronald Reagan administration, BAC stock jumped approximately 597%. But in the same period, total public debt as a percentage of gross domestic product increased 63%. In other words, to get that juice flowing to bellwether names like BofA, the Federal Reserve pushed a dovish monetary policy.

Bank of America stock vs. public debt as % of GDP
Click to Enlarge
Source: Chart by Josh Enomoto

Other administrations did the same to get out of trouble. For instance, former President Barack Obama, in the depths of the Great Recession, saw his administration jump the debt-to-GDP ratio by 33.5%. Sure enough, Bank of America stock responded, soaring roughly 332% while Obama was in charge.

So, the blueprint is laid out for President Trump or – God help us – President Joe Biden. As long as you get the Fed to print those greenbacks – I’m using colloquial language here – we should be fine.

However, that doesn’t seem to be what the data suggests. While Obama oversaw the rise of Bank of America stock along with the rest of the markets, we should remember one thing: he was working with a deflated nominal base.

If we analyzed 2007 through first-quarter 2020, we see that the debt-to-GDP ratio increased a whopping 73% while BofA shares plunged 30%. Even if the comparison ended at Q4 2019, BAC would still be down nearly 16%.

Why Gold Matters

While the longer-term outlook for Bank of America stock raises questions, there are arguably few inquiries about gold. The yellow metal is up big this year, but so is silver. And palladium and platinum appear to be on the cusp of significant upside moves.

Anytime gold moves like this you should really question the fundamentals. After all, gold doesn’t pay a dividend. It’s not tied to the productivity of manufacturing or human innovation. Really, it’s an element on the periodic table. In this day and age, gold should be relegated to the dustbins of history.

Now, some might counter that the immediate emotions of fear and uncertainty are bolstering gold. But how do you explain the other metals? Call me crazy, but it seems the smart money is only bullish on TV. When these true influences are within private circles, they’re buying gold.

I mean, who else is buying this stuff? It can’t just be Alex Jones listeners.

Ultimately, I will repeat what I said earlier. If you’re risk averse, you may want to hold off on BAC stock. Listen, I hope I’m dead wrong about all this. Gold at whatever ridiculous price implies huge problems for our society. But I’m just going to go with what the supply-demand picture is telling me, not a bunch of talking heads on the telly.

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 is long the precious metals mentioned in this article.

Article printed from InvestorPlace Media,

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