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Bank of America Corp Isn’t Ready for Upcoming Challenges

Josh Enomoto

Last year, I prematurely doubted Bank of America Corp (NYSE:BAC). With President Trump’s unexpected victory back in 2016, his pro-business stance was the major consolation for most Americans. But after the post-electoral boost, we just hadn’t seen much from Bank of America stock. At the time, I felt this was an investment from which to steer away.

Boy, was I wrong. It took a few months after I wrote my piece, but Bank of America stock eventually rocketed past its doldrums. It eventually closed 2017 up nearly 33%. In comparison, chief rival JPMorgan Chase & Co. (NYSE:JPM) gained 25%, while Citigroup Inc (NYSE:C) followed close behind at 24.4%. Scandal-ridden Wells Fargo & Co (NYSE:WFC) closed out at 12%.

Even at this present juncture, Bank of America stands out from the rest of its “big four” peers. On a year-to-date basis, Bank of America stock is up 2%. That’s a pedestrian figure compared to its prior performance. However, Citigroup is down more than 6% for the year, while WFC shed an alarming 13%. JPM leads the majors, but not by much at 4.6%.

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It seems like BAC is primed for another contrarian move. However, an interesting bit of Bank of America stock news caught my attention. About two weeks ago, Bank of America Vice Chairman Anne Finucane stated that “it’s not our intent to underwrite or finance military-style firearms.” BAC’s firearms-related clients include Vista Outdoor Inc (NYSE:VSTO), Remington, and Sturm Ruger & Company Inc (NYSE:RGR).

In my view, the decision lacks justification. Alcoholic beverage-makers kill people and destroy families, yet I don’t see Bank of America putting up a fuss about them. But from an investment perspective, I’m concerned about this recent round of BAC stock news.

The company doesn’t have the luxury to pick and choose its clients based on (supposedly) moral principles.

Bank of America Stock Faces Serious Headwinds

Thanks to its recent run-up in the markets, BAC probably assumes that the good times will keep rolling; hence, it’s rejecting businesses and long-time clients that don’t align with their corporate values. However, it may end up regretting this move.

For starters, the economy moving forward may not be nearly as strong as some bulls assume. So far this year, the average premium for holding a 30-year Treasury note to maturity compared to the 10-year note is less than 4%. The last time the premium was single-digits or below was in 2006 and 2007, in the midst of the housing crisis.

Treasury yields, BAC stock

While not an end-all, be-all barometer, 30-year Treasuries generally pay a higher yield than shorter-term Treasuries. Obviously, this is due to the time risk in holding to maturity. So when that premium vanishes as quickly as it did this year, you want to pay attention. Consider that during the tumultuous period in the late 1970s to early 1980s, the premium was sharply negative.

Another reason I look dimly on the aforementioned BAC stock news is that rising benchmark interest rates aren’t necessarily positive for Bank of America. Since 1980, BAC shares and the 10-year Treasury yield share an inverse correlation; as one metric rises, the other falls. Moreover, since the beginning of this decade, no statistically significant relationship between interest rates and the Bank of America share price exists.

In theory, banks benefit from higher interest rates due to increased profitability on their loans. But in this day and age, Wall Street hates rising rates because it could slow a fragile economic recovery.

With geopolitical pressures, as well as domestic discord hounding the current administration, nothing is guaranteed. Thus, I don’t view kicking out paying clients as wise.

What is Bank of America Thinking?

The BAC stock news is related to the ongoing firearms debate in name only. In reality, this is all about management stupidity. I hate it when companies make unforced errors, and Bank of America committed a whopper.

I’m not sure what they were trying to accomplish. Did the body count just get too high for them, whereas it wasn’t high enough in prior years? Were customers threatening to jump ship to a non-firearms business lending bank?

I suspect that Bank of America simply wanted to make a political statement, which was unnecessary. If anything, it only sent paying clients to a competitor, which is lunacy.

BAC has massive headwinds charging its way. If it wants to succeed, the leadership must concentrate on navigating these challenges, as well as improving shareholder value. Instead, it’s playing politics and penalizing perfectly good business clients. I can’t stand such arrogance, which is why I’m still sidelining Bank of America stock.

As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.

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