The financial services sector, the S&P 500’s third-largest sector by weight, is getting resurrected this year. Last year, the Financial Select Sector SPDR (NYSEARCA:XLF), the largest exchange traded fund tracking the sector’s stocks, slumped 13% and that was with the benefit of four interest-rate hikes by the Federal Reserve.
Barely more than three months into 2019, a year in which it is increasingly unlikely that the Fed will hike rates, XLF is up about 12%. XLF is home to 67 stocks, so there are plenty of names driving the fund higher this year. One of the primary contributors to the rally of XLF and that of the broader financial services sector is Bank of America Corp. (NYSE:BAC). BAC stock is up 18.30% year-to-date, meaning it is beating XLF by more than 50%.
Yield Curve Inversion
Recently, the yield curve inverted, meaning 10-year Treasury yields jumped over those on 3-month notes, a scenario that has been a reliable indicator of coming recessions. But that inversion has been reversed, boosting BAC stock and other bank names.
“That’s good news for banks on its own, but it also clears the way for investors to focus on another positive development: the Federal Reserve’s intention to hold off on raising interest rates, a stance the central bank made clear after the March 20 meeting of its monetary-policy committee,” according to Barron’s.
In April, Bank of America stock is up about 5% even after CEO Brian Moynihan warned of lower first-quarter trading revenue.
“Bank of America’s trading revenue probably dropped about 15 percent in the first quarter amid a slow start to the year,” Moynihan said. “Equities revenue dropped more than 20%, in part because of the U.S. government shutdown,” reported CNBC.
More Than Trading
While Bank of America has significant investment banking and trading operations, it is not a traditional investment bank. Rather, BAC is a money-center bank, offering products such as credit and debit cards, residential mortgages, home equity loans, automotive loans and more.
Money-center banks make money by borrowing funds at short-term rates and making loans at longer-term rates. On the consumer-banking front, Bank of America faces intense competition. While the company has massive footprints in major markets such as California, the New York metro area and Texas, rival JPMorgan Chase & Co. (NYSE:JPM), the largest U.S. bank, has announced that it’s opening new branches in some markets currently dominated by BAC.
However, competition is nothing new among the major money-center banks, and Wall Street remains bullish on BAC stock. The average analyst price target on Bank of America stock is just over $33, implying upside of more than 10% from today’s early-afternoon price of $29.15.
Bank of America stock’s dividend has also grown quite a bit . Today BAC stock pays an annual dividend of 60 cents per share and yields 2.06%. That is up 1.32% from a year ago. At the end of the first quarter of 2018, Bank of America’s quarterly payout was 12 cents per share, compared with 15 cents today.
The Bottom Line on BAC Stock
The banking industry’s fundamentals are solid, perhaps even better than in the years before the financial crisis. Big money-center banks, such as Bank of America, are leading that fundamental resurgence.
Investors should note that buying BAC stock, or any other big-bank stock for that matter, is a bet on continued economic expansion. It is common sense: banks make more loans when the economy is good and pull back on lending when the economy slows. A sudden deterioration of U.S. economic fundamentals would hurt the cyclical financial-services sector.
Bank of America stock is up 28.64% from its December lows and continued rejection at the $30 level could send the shares lower, giving investors who missed the recent run higher an opportunity to get into the BAC game.
As of this writing, Todd Shriber owns shares of XLF.
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