Bank of America Corp (BAC): An Ominous Warning

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Bank of America Corp (NYSE:BAC)Last week, the Dow Jones Industrial Average (Dow Jones Indices:.DJI) and broad-based S&P 500 hit all-time highs, surpassing the psychological 15,000 and 1,600 mark, respectively. The Nasdaq Composite (INDEXNASDAQ:.IXIC), while well off its all-time high, still hit its highest mark in more than 12 years.

The story is the same no matter where you look: The economy, the jobs picture, and housing are all improving. The U.S. economy only grew GDP at a 2.5% clip in the first quarter, but that’s up from just 0.4% in the fourth quarter. Furthermore, the unemployment rate clocked in at a five-year low (7.5%), jobless claims hit a five-a-half year low on a seasonally adjusted basis (323,000), and the Case-Shiller Index, which measures home prices in the 20 largest U.S. cities, rose 9.3% over the year-ago period.

You might consider these figures irrefutable evidence that we’re in the midst of a steady recovery that could lead to many years of sustained growth for all three indexes. However, a recent Gallup survey would completely refute that notion.

Released on Wednesday, Gallup randomly surveyed 2,017 adults across the U.S. and discovered that only 52% directly or indirectly own stock. This is the lowest reading since Gallup began tracking this poll in 1998 and continues a precipitous downtrend witnessed since 2007, when stock ownership was at 65%.


Percentage of U.S. adults invested in the stock market. Source: Gallup poll.

It also adds fuel to the fire that this rally from the recession lows may be among the most hated ever.

What’s behind investors’ lack of faith
The way I see it, there are four key reasons investors have significantly pared their stock holdings in recent years.

1. Companies aren’t instilling trust with investors
The biggest problem with this rally is investors really don’t have any reason to trust many of the nation’s largest companies. Ask around and most people will tell you they didn’t particularly care for their bank before the financial crisis. Ask them how they feel five years removed from that crisis, and most people will talk your ear off with vitriol for their bank.

Take Bank of America Corp (NYSE:BAC), for example. Bank of America Corp (NYSE:BAC) settled a long-running dispute with MBIA Inc. (NYSE:MBI) last week over mortgage-backed securities for $1.6 billion. If this had been but one or two settlements that Bank of America Corp (NYSE:BAC) was settling relating to the financial crisis, investors would probably understand. But we’re not even in the same ZIP code when it comes to settlement and ongoing lawsuits. Bank of America Corp (NYSE:BAC) settled for $10.8 billion with the U.S. Justice Department and 49 state attorneys general over its mortgage servicing practices, forked over $8.8 billion to Fannie Mae, and faces an additional $5 billion to $15 billion in private investor lawsuits — and that isn’t even the half of it!

How can you feel confident about investing when the backbone of the financial sector is still such a mess?

2. Technology has changed things
Sure, the Internet has been around for 20 years, but in terms of what the Internet can do for investors and institutions, it has evolved dramatically over the past decade. The access to almost instant news and data via brokerage research centers, public portals like Yahoo! Finance, and even social media have changed the way news is disseminated. Worse yet, it’s evolved investing into trading.

With news available at our fingertips, and institutions able to use algorithm-based programs to trade fractions of a penny faster than the blink of an eye (often referred to as high-frequency trading), the average holding period for owning stocks has dropped from eight years in the 1960s to less than a week, according to LPL Financial’s Jeff Kleintop. People are easily swayed by market-changing news that wasn’t easily disseminated even 10 years ago. With the market being ruled by traders instead of investors, it’s no wonder many of the remaining long-term investors have little faith in this rally.

3. A wealth transfer is under way
Arguably, there isn’t a group of individuals that took it on the chin worse during the recession than baby boomers. When stocks peaked in 2007, 65% of all Gallup respondents reported owning stocks in one form or another. Of those who participated in the 2008 survey, the 30-49 age group and the 50-64 age group were listed well above the average, with 72% and 71% affirming that they owned stock. Five years later, these figures had fallen by 14 percentage points and 10 percentage points, respectively.

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