External Risks Are Keeping a Lid on Bank of America Stock

Vince Martin

Tue, May 28, 2019, 5:49 AM

But it’s not even quite that simple. A trade war in theory could drive higher inflation, not just lower growth. That would lead the Federal Reserve to potentially cut rates. A rate pause already sent BAC stock tumbling back in March. Cuts would be even worse and would reverse the benefits of rising rates that have helped earnings and the Bank of America stock price since the 2016 elections.

Political risk is a factor as well. BAC stock was one of the big winners of that election, gaining some 50% in a matter of months. The thesis then relied partially on a Republican-controlled government rolling back Dodd-Frank and other banking regulations.

That narrative hasn’t quite played out, even though the law was altered last year. But the fear now is that regulation will increase under a potentially Democrat-controlled government. That’s particularly worrisome if trade war difficulties hit the economy and lower President Donald Trump’s re-election prospects.

Bank stocks like BAC are notoriously cyclical; they will rise and fall in line with macroeconomic expectations. What’s happening now, however, is that the economic exposure of the equity is being amplified by political exposure at home and abroad. Therefore, it’s little surprise that BofA has been so volatile and unable to maintain a rally.

Where Does BAC Stock Go from Here?

I continue to recommend BAC stock, along with JPMorgan Chase (NYSE:JPM), for the long run. But it’s not hard to wonder whether the sideways trading in both securities might continue for some time. As InvestorPlace contributor Bret Kenwell pointed out last month, JPM has faced similar difficulties in terms of gaining traction.

Because the question here is, what really changes? The trade war has no solution on the horizon. The next presidential election is almost 18 months away. Anxiety over a coming recession won’t fade until the recession actually arrives. BAC stock is going to be grinding through external fears for a while.

That’s true for all bank stocks, admittedly. But Citigroup (NYSE:C) — which actually has been the star among big banks in 2019 — and Wells Fargo (NYSE:WFC) at least offer turnaround stories. BAC and JPM are performing well relative to their modest expectations. Yield-focused investors could look at Canadian banks like The Toronto-Dominion Bank (NYSE:TD) and Bank of Montreal (NYSE:BMO), though those banks have their own real estate and mortgage-loan risks.

Even with BAC stock back near $28, you’ve got to wonder if a discount is coming over the next 12 months. BofA does trade only modestly above book value, but it traded below book for years after the crisis. Its 9x forward earnings is cheap, but not necessarily dramatically so if rates are cut again and/or the economy finally slows down.

Long-term, I still like BAC. I wouldn’t blame investors for simply riding out the noise until shares rally again. But it’s becoming increasingly likely that those long-term investors will need to have quite a bit of short-term patience.

As of this writing, Vince Martin has no positions in any securities.