Financial stocks are on the cusp of a momentous year ahead. Barring the February 2018 market correction, banking and financial stocks are on the way up. One of the most prolific stocks in recent years is Bank of America (BAC). The stock is priced around $32 per share (March 20, 2018) and has been hovering there and about for the past 1 month. The 50-day moving average of the stock is less than the current price – a bullish sign for investors. Additionally, the 200-day moving average price of $26.99 is significantly less than the prevailing price – another sign that the stock is appreciating strongly. These trends have been in play for quite some time. Bank of America (BAC) has been one of the better banking stocks in recent times.
The question which stakeholders should be asking is the following: Why is Bank of America (BAC) performing so strongly when other stocks in the banking and financial sector are performing poorly. As a case in point, consider the graphics of Wells Fargo & Company (WFC), Citigroup Inc.(C), among others. The charts of these bank stocks are displayed below – none too impressive.
WFC (Wells Fargo & Company)
The fact of the matter is that Bank of America stock is fundamentally sound. It is a value proposition for investors, and everybody knows that. There is upside potential in the stock given that many investors believe it is undervalued. Since July 2016, the stock is up approximately 150%, and it returned a hefty 35% in 2017. With the US economy in full swing, there’s no reason to doubt the bullishness of BAC, despite a few concerns that naysayers have. For starters, there is a degree of volatility in the markets, and we’ve seen evidence of this in the February run on banking and financial stocks when large-scale selloffs took place. For the uninitiated, this is not the end of BAC’s run – but it is definitely a slowdown for the short-term.
Here are the reasons why Wilkins Finance professionals believe that 2018 is going to be another solid year for banking and financial stocks:
– The Federal Reserve Bank was always going to raise rates in 2018 and March was as good a time as any. That the Federal Funds Rate sits snugly in the region of 1.50% – 1.75% comes as no surprise. This means that a 25-basis point rate hike is extremely likely. Which sectors of the economy benefit from these rate hikes? Banks and financial stocks. As the federal funds rate (FFR) increases, so too do the returns generated by banks, credit card companies and other financial institutions.
– According to The Economist, the short-term impact of tax changes will be somewhat detrimental to banks, when they repatriate earnings parked offshore et al, but the long-term benefit is boosted earnings, higher profits, more investment in the US economy etc. We can expect a lag effect with tax-related matters, but it will be positive for banks. When corporate tax rates are lowered from 35% + to 21% and thereabouts – this is a big win for bank stocks like BAC.
– Wells Fargo and Company is still battling demons from the fake account scam that wracked the company in recent years. It takes a lot to undo loss of credibility among customers, but this major US bank is likely to stage a comeback with solid back to back returns expected throughout the year.
How Do Bank Stocks Benefit from Interest Rates?
If banks pay interest and receive interest payments, it is a fair question to ask how banks benefit from higher interest rates at the federal level. They do this through the spread. This is the difference between the interest rate they pay on savings accounts and the interest rates they charge when they loan money to customers. Naturally, banks like BAC gear the interest rate issue in their favour. They increase the spread as the federal funds rate rise. It is unknown what the long-term effect of rising interest rates are on business activity at banks.
Customers may be averse to paying higher rates and stop spending as much on credit cards, personal loans, business loans etc. There are ways to mitigate investments in bank stocks like BAC, C, and WFC. And they come in the form of derivative trading instruments known as CFDs. A CFD is not a stock – rather it is a contract that tracks the price movement of the underlying financial instrument, in this case Bank of America Corporation. Traders have the option to profit to the upside or downside with CFDs by going long or by going short on CFD products. For more information, read this CFD definition. CFDs function like safe-haven assets such as gold and the Japanese Yen. They are protectors against market volatility. For a trader or investor with bank stock holdings, a CFD (derivative product) could act as the perfect hedge if markets sour.