Bank of America (BAC) Under the Spotlight: Buy or Sell in the Face of Inflation Concerns?

In the aftermath of three regional banking collapses earlier this year, the U.S. banking sector has wrestled amid dwindling deposits with customers seeking higher yields, escalated deposit costs, low loan growth, and shrinking profit margins. However, the industry showcased a degree of stability.

This semblance of recovery emerged as the Federal Reserve raised the benchmark interest rates to the peak in over two decades, a trend anticipated to reverse in the upcoming year. Typically, increased interest rates produce gains for banks through elevated net interest income.

Nevertheless, the U.S. banking sector persists in hemorrhaging deposits. Deposits have declined for the fifth consecutive quarter ending June 30, 2023. During the second quarter alone, FDIC-insured banks witnessed a nearly $100 billion drop in deposits.

Furthermore, the industry’s net income saw a $9 billion reduction to $70.80 billion in the second quarter, and the average net interest margin shrank by three basis points to 3.28%.

The perceived stability was also questioned merely two weeks after Moody's decided to downgrade the credit ratings of 10 mid-sized and smaller banks. Adding to the unease, bond rating agency Fitch has issued warnings, and subsequently, S&P Global Ratings cut the ratings of five American banks and put an extra two on alert, given the increasingly complex high-interest rate business climate.

Such a succession of downgrades from credit rating agencies could make obtaining loans more complex and costly for borrowers. Shares of the nation’s second-largest bank, Bank of America Corporation (BAC), suffered along with other bank stocks after Fitch’s warnings.

The Current Scenario

BAC has reported an increased number of its customers struggling with credit card payments, acknowledging that its credit card sector's performance lags behind expectations. Rising charge-off rates delineate this underperformance.

In the second quarter of 2023, the bank saw consumer net charge-offs hit $869 million, up from $571 million from the prior year quarter. Concurrently, provisions for losses remained steady at $1.1 billion.

A surge in the net charge-off rate and the delinquency rate of BAC's BA Master Credit Card Trust II were noted in August. Nevertheless, these rates are still below those recorded before 2019.

The net charge-off rate for the trust was 2.13% in August, up from 1.89% in July but significantly less than the 2.49% registered in August 2019. Likewise, BAC's delinquency rate escalated to 1.26% in August, slightly higher than July's figure of 1.24% but keeping under the 2019 benchmark of 1.57%. While these elevated rates might indicate stable consumer conditions, some may perceive them more pessimistically.

BAC's principal receivables outstanding were valued at $13.8 billion in August, suggesting a nominal shift in lending activity relative to the preceding month. Until recently, consumers were predominantly focused on clearing their credit card and other loan debts. However, current macroeconomic instabilities might put this trend into reverse.

The Real Picture

U.S. consumers have demonstrated robust financial activity throughout this year, with persistent spending expected to catalyze a third-quarter GDP growth of up to 3.5%. Harnessing the ability of credit cards and buy-now-pay-later (BNPL) services, consumers continue to shop. Despite various cost-saving efforts, current consumption patterns still surpass the average consumer's affordability.

Bank charge-offs and write-offs maintained a steady level until a shift occurred in July when the country's six major banking institutions disclosed the highest loan loss rates since the onset of the pandemic. Credit card repayments were disproportionately affected. Credit card loans constitute nearly 25% of BAC's total charge-offs.

These heightened charge-off rates signal potential challenges as more consumers default on their monthly payments. This trend is emerging in a financial landscape where consumers grapple with escalating costs and interest rates. Concurrently, wage stagnation lags behind inflation, and supplemental benefits have been reduced.

Current consumer spending reflects necessity instead of robustness. Consumers are compelled to spend more despite receiving marginally lower goods or services than before. Instances of arrears are recorded across multiple debt avenues, including credit cards, auto loans, mortgages, and student loans. The absence of immediate full payment has fostered a propensity toward overspending.

Unsustainable spending patterns may cause a downturn in consumer spending by early 2024, fueled by mounting credit card debts and dwindling pandemic-era surplus savings. The second quarter witnessed a 4.6% spike in consumer credit card debt, setting a record $1.03 trillion, as opposed to $986 billion in the first quarter.

As the burden of irrecoverable debt continues to strain lenders' financial stability, net charge-offs for BAC will keep rising.

Investors might want to consider the following additional factors:

Recent Developments

BAC has been imposed with staggering financial penalties in the recent past, totaling $250 million, following a series of dubious practices that include overdraft fee manipulation, withholding credit card rewards, and the initiation of unauthorized accounts. While this may have short-term impacts on its financial performance for the upcoming quarter, it is not expected to cause substantial overall financial implications.

Furthermore, the bank ended the second quarter incurring over $100 billion in paper losses due to its aggressive investment in U.S. government bonds. This figure significantly surpasses the unrealized bond market losses of BAC's competitors.

BAC's investments in technology are evidently paying off. Its digitization efforts have successfully translated into an unprecedented increase in Zelle transactions by more than double since June 2020, along with a digital banking adoption rate of 74% among households. Engaging customers via online and mobile transactions is significantly less costly for the bank than traditional in-person interactions.

Over the past three years, the financial institution has conscientiously refined and modernized its financial centers nationwide. This integral enhancement enables the bank to bolster its digital services and effectively cross-market various products.

By 2026, it envisages expanding its financial center network into nine emergent markets. In conclusion, its investments in technology are expected to bolster the bank's operating efficiency.

On August 29, BAC declared the introduction of its highly acclaimed Global Digital Disbursements platform to commercial clients who hold deposit accounts at the bank's Canadian branch.

With this innovative solution, users can process an array of B2C payments and C2B collections using the client's email address or mobile phone number as identifiers. This feature presents a cost-effective and user-friendly alternative for companies seeking to replace cash or cheque payments.

Robust Financials

For the second quarter ended June 30, 2023, BAC’s total revenue, net of interest expense, increased 11.1% year-over-year to $25.20 billion. Its net income applicable to common stockholders rose 19.7% year-over-year to $7.10 billion.

Additionally, its EPS came in at $0.88, representing an increase of 20.5% year-over-year. Also, its net interest income rose 13.8% over the prior-year quarter to $14.16 billion. In addition, its CET1 ratio came in at 11.6%, compared to 10.5% in the year-ago quarter.

Robust Growth

Over the past three and five years, BAC’s revenue grew at 8% and 2.5% CAGRs, respectively. Its net interest income for the same periods grew at CAGRs of 6.4% and 4.3%, respectively.

Net income and EPS grew at 13.6% and 18.8% over the past three years, whereas, over the past five years, these grew at 6.7% and 12.8%, respectively. The company’s total assets grew at 4.4% and 6.4% CAGRs over the past three and five years, respectively.

Mixed Valuation

In terms of forward non-GAAP P/E, BAC’s 8.67x is 4.4% lower than the 9.07x industry average. Likewise, its 0.87x forward Price/Book is 10.4% lower than the 0.97x industry average.

On the other hand, in terms of forward Price/Sales, BAC’s 2.32x is 2.1% higher than the 2.27x industry average.

Mixed Profitability

BAC’s trailing-12-month Return on Common Equity (ROCE) of 11.41% is 1% higher than the 11.30% industry average, whereas its trailing-12-month Return on Total Assets (ROTA) of 0.95% is 16.9% lower than the 1.15% industry average.

The stock’s trailing-12-month cash from operations of $44.64 billion is significantly higher than the industry average of $137.73 million.

Growing Institutional Ownership

BAC’s robust financial health and fundamental solidity make it an appealing investment opportunity for institutional investors. Notably, several institutions have recently modified their BAC stock holdings.

Institutions hold roughly 69.7% of BAC shares. Of the 2,816 institutional holders, 1,226 have increased their positions in the stock. Moreover, 139 institutions have taken new positions (42,890,796 shares).

Price Performance

The stock has declined 13.5% year-to-date to close the last trading session at $28.65. However, over the past year, it lost 17.4%, whereas over the past six months, it gained 3%.

Shares of BAC have been making lower highs for the past 12 months, but they have not made a low since March. Its share price displayed upward and downward movement multiple times from January to September 2023. The overall value so far declined compared to the beginning of the year.

Moreover, BAC’s stock is trading below its 100-day and 200-day moving averages of $29.19 and $30.7, respectively, indicating a downtrend.

However, Wall Street analysts expect the stock to reach $35.13 in the next 12 months, indicating a potential upside of 22.6%. The price target ranges from a low of $27 to a high of $49.

Mixed Analyst Estimates

For the fiscal year ending December 2023, analysts expect both BAC’s revenue and EPS to increase 6.3% year-over-year to $100.91 billion and $3.39, respectively. Its revenue and EPS for fiscal 2024 are expected to decline 0.8% and 4.2% year-over-year to $100.13 billion and $3.25, respectively.

Moreover, for the quarter ending September 2023, its revenue is expected to surge 2.5% year-over-year to $25.12 billion, whereas its EPS is expected to decline marginally year-over-year to $0.80.

Bottom Line

The recent upturn in bank charge-offs marks a return to normalcy for the industry after an unprecedented period of low levels during the pandemic, attributed largely to decreased unemployment and substantial government financial relief initiatives.

However, this surge in 2023 introduces an anomaly in the banking sector. Several banking institutions have acquiesced under pressure, and financial experts caution that should unemployment rise above 7%, the industry could face significant complications.

Moreover, consumers will face the reinstatement of student debt payments throughout the latter half of the year, as the forbearance period concludes in October. This would force customers to navigate difficult choices regarding credit card and student debt payments, potentially causing a broader impact on delinquency rates nationwide.

Major banks maintain a positive front that there is little cause for concern moving forward. However, this optimism may rely heavily on steady unemployment rates around the 5% mark - a contingency for which plenty of banks have pre-prepared provisions. Yet, if unemployment rates deteriorate further, banks and consumers could encounter hardship during the latter half of 2023.

Despite the adversities presented, BAC continues to display a robust capacity for growth amidst a tumultuous climate. Notably, despite a downshift in revenues and net income for its Global Wealth and Investment Management unit during the second quarter, the bank still surpassed Wall Street's top and bottom-line estimates.

Also, in the last reported quarter, when most finance firms recorded subdued Investment Banking business performance, BAC’s IB numbers were impressive. Its total IB fees of $1.21 billion increased 7.4% year-over-year, which boosted its global banking unit's net income by 76% to $2.7 billion.

Nevertheless, considering the bank’s tepid price momentum, mixed analyst estimates, valuation, and profitability, it could be wise to wait for a better entry point in the stock.

How Will Bank of America (BAC) Stock Fare Against Scandal?

America’s second-largest bank by assets, Bank of America Corporation (BAC), is mired in a scandal involving double-dipping on fees imposed on customers with insufficient funds in their accounts, withholding reward bonuses that were promised to credit card customers, and misappropriating sensitive personal information to open accounts without customers’ knowledge or permission.

The Consumer Financial Protection Bureau (CFPB) director Rohit Chopra said, “Bank of America wrongfully withheld credit card rewards, double-dipped on fees, and opened accounts without consent. These practices are illegal and undermine customer trust. The CFPB will be putting an end to these practices across the banking system.”

The bank has been ordered to pay $250 million in fines and refunds, with the CFPB and the Office of the Comptroller of the Currency (OCC) saying that BAC has violated several laws since 2012. While the CFPB ordered BAC to pay $100 million to the affected customers and $90 million in penalties, the OCC ordered BAC to pay a penalty of $60 million. The $250 million in fines and refunds will pressure the company’s near-term financials.

This is not the first time that U.S. regulators have fined BAC. In 2014, the bank was fined $727 million for “illegal credit card practices.” In May 2022, the CFPB ordered the bank to pay a $10 million civil penalty over unlawful garnishments, and additionally, it was fined $225 million by the CFPB and OCC last year automatically and unlawfully freezing customer accounts with a fraud detection program during the pandemic.

Since the bank was ordered to pay the penalties and refund, the stock has gained marginally. However, the stock has lost year-to-date and over the past year.

Looking at BAC’s recently reported financials, the Global Wealth and Investment Management segment’s revenue declined 3.5% year-over-year to $5.24 billion for the second quarter. The segment’s net income declined 15% year-over-year to $978 million due to the global slowdown in the deal-making business.
For the quarter that ended June 30, 2023, BAC’s EPS and revenue beat the consensus estimates. The bank has set aside $602 million as a provision for credit losses.

Here’s what could influence BAC’s performance in the upcoming months:

Robust Financials

BAC’s net interest income for the second quarter ended June 30, 2023, increased 13.8% year-over-year to $14.16 billion. Its return on average assets came in at 0.94%, compared to 0.79% in the year-ago period. The company’s net income applicable to common shareholders rose 19.7% year-over-year to $7.10 billion. Its EPS came in at $0.88, representing an increase of 20.5% year-over-year.

Mixed Analyst Estimates

Analysts expect BAC’s EPS and revenue for fiscal 2023 to increase 5.3% and 5.5% year-over-year to $3.36 and $100.14 billion, respectively. Its EPS and revenue for fiscal 2024 are expected to decline 2.4% and 0.7% year-over-year to $3.28 and $99.47 billion, respectively.

Mixed Valuation

In terms of forward non-GAAP P/E, BAC’s 8.67x is 4.4% lower than the 9.07x industry average. Likewise, its 0.87x forward Price/Book is 10.4% lower than the 0.97x industry average.

On the other hand, in terms of forward Price/Sales, BAC’s 2.32x is 2.1% higher than the 2.27x industry average.

Mixed Profitability

BAC’s 11.02% trailing-12-month Return on Common Equity is 1.1% lower than the 11.15% industry average. Likewise, its 0.90% trailing-12-month Return on Total Assets is 20.2% lower than the 1.12% industry average.

On the other hand, the stock’s 30.28% trailing-12-month net income margin is 17% higher than the industry average of 25.87%.

Bottom Line

BAC has been previously fined for other illegal practices, but the bank managed to navigate the rough waters, growing from strength to strength. Although its revenues and net income from the Global Wealth and Investment Management segment took a hit in the second quarter, the bank managed to beat Wall Street EPS and revenue estimates.

Although the penalty and refund of $250 million might dent its financial performance over the next quarter, it is unlikely to affect its financials significantly. Moreover, BAC was left with $106 billion in paper losses at the end of the second quarter due to its decision to invest heavily in the U.S. government bonds market. The amount is significantly higher than its peers’ unrealized bond market losses.

Given its mixed analyst estimates, valuation, and profitability, it could be wise to wait for a better entry point in the stock.

Inflation Eases: Stocks to Watch Amid Q2 Financial Earnings

After an eventful year, corporate America's crème de la crème is set to kick off the second-quarter earnings season.

The performance of banking majors, such as JP Morgan Chase & Co. (JPM), Wells Fargo & Company (WFC), and Citigroup, Inc. (C), which are scheduled to report on Friday, July 14, would be indicative of the overall health of the economy. Their numbers, specifically deposit flows and loan growth, might impact the share prices of regional banks, which attracted much-unwanted attention earlier in the year.

As the economy seems to be finding its way into calmer waters with a greater-than-expected moderation of inflation, before we discuss the outlook for the trio of major banks ahead of their earnings release, for the uninitiated, here’s a brief recap of upheavals they had to live through and work their way around over the past year.

How We Got Here?

As the “transitory” inflation in the aftermath of the beginning of the armed conflict in Ukraine morphed into a not-so-transitory and vicious feedback loop that resulted in decades-high inflation, the Federal Reserve and other major central banks chose to respond with aggressive interest-rate hikes.

While the increased borrowing costs took the wind out of the sails of an overheating economy, it resulted in significant markdowns in the “ultra-safe” long-term U.S. Treasury securities in which many of the regional banks had invested their mushrooming deposits of cash, mostly received as stimulus during the pandemic.

However, as the going got tough for various businesses amid increased borrowing costs, the banks’ clients began to dip into their deposits. In such a scenario, to meet its payment obligations, the banks’ mark-to-market losses rapidly crystallized into realized ones.

Consequently, Silicon Valley Bank (SBV) announced that it booked a $1.8 billion loss, and the chaos and panic triggered by its failure wiped out a combined $52 billion in the market value of JP Morgan Chase & Co. (JPM), Bank of America Corporation (BAC), Wells Fargo & Company (WFC), and Citigroup, Inc. (C).

Credit Suisse and First Republic Bank became two other casualties, which JPM and UBS proactively absorbed.

The banking turmoil proved to be teasers to a similar, but orders of magnitude larger, scare. As the U.S. Treasury looked set to exhaust its ‘extraordinary measures’ to manage the national debt by June 5, the world’s richest economy, which also issues the global reserve currency, was projected to run out of cash and fail to meet its obligations, until the self-imposed debt ceiling was raised or suspended.

With the extent to which the U.S. and global economy could be undermined if the default comes to pass deemed by treasury secretary Janet Yellen an “economic catastrophe,” it is not difficult to understand why business leaders, such as JPM Chief Jamie Dimon, convened a ‘war room’ over the debt ceiling standoff.

However, calmer and more rational heads prevailed in Washington, D.C., albeit at the eleventh hour. President Joe Biden and House Speaker Kevin McCarthy reached an agreement to suspend the current $31.4 trillion statutory debt ceiling until January 1, 2025, in exchange for discretionary spending caps for six years.

Where Are We Now?

Post the shakeups, all 23 banks successfully weathered the Federal Reserve’s annual stress test toward the end of the last month. Even in a severe recession scenario simulated in the test, the banks were able to maintain minimum capital levels, despite $541 billion in projected losses for the group while continuing to provide credit to the economy.

Given the endurance and resilience that was successfully displayed, an indication of lighter capital requirement resulted in banks, such as JPM, WFC, The Goldman Sachs Group, Inc. (GS), and Morgan Stanley (MS), using resources freed up to payout higher dividends to their shareholders.

JPM will lift its quarterly dividend to $1.05 a share from $1, while WFC will hike dividends to $0.35 from $0.30. Moreover, both banks have said that they have the capacity to repurchase shares. Despite an increase in minimum capital requirement from 12% of risk-weighted assets last year to 12.3% after this year’s test, C’s board has also approved a dividend increase from $0.51 per share to $0.53.

The stocks have gained over the past month, given the demonstrated staying power and the potential windfall for the shareholders.

The (Probable) Road Ahead

For the second quarter of the fiscal year:

JPM’s revenue and EPS are expected to increase by 32.1% and 37.7% year-over-year to $39.12 billion and $3.80, respectively.

WFC’s revenue and EPS are expected to increase by 22% and 39% year-over-year to $20.07 billion and $1.14, respectively.

C’s revenue is expected to increase by 8.3% year-over-year to $19.35 billion. However, its EPS is expected to decline by 38.7% over the prior-year period to $1.41.

While the outlook seems largely optimistic, some analysts have warned that large banks' earnings have peaked with continued declines in net interest incomes, normalization of credit costs, and increased expenses due to inflation.

Bank of America (BAC) Brace for a 'Big Collapse' - Here's Your Plan

According to recent data released by payroll processing firm ADP, private sector jobs surged by 497,000 in June, coming in at more than twice the expectations and reigniting fears of resumption in rate hikes by the Federal Reserve, which markets have been ignoring during the latest bull run.

Consequently, as the 2-year treasury yield hits a 16-year high amid a broad market selloff, a recent note by Michael Hartnett, chief investment strategist for Bank of America Corporation (BAC), that, rather than seeing a long-lasting bull market, the jump represents a “big rally before big collapse” is seeming more credible than ever.

After ten consecutive and aggressive interest-rate hikes over the past year, the Fed opted for a pause citing concerns regarding economic growth and the need to assess lagged impact of policy.

However, in his remarks to Congress a week after the June 13-14 FOMC meeting, Fed Chairman Jerome Powell said the central bank has “a long way to go” to bring inflation back to the Fed’s 2% goal.

Moreover, according to the meeting minutes, almost all Fed officials concurred to indicate further, albeit slower, tightening as inflation remains elevated at 4.6% and job openings outnumber available workers by a nearly 2-to-1 margin.

Gita Gopinath, first deputy managing director of the International Monetary Fund (IMF), also echoed that central bankers “should continue tightening and importantly [interest rates] should stay at a high level for a while.”

Hence, with pent-up demand for travel and leisure during the pandemic responsible for the expectation-crushing employment numbers, with Leisure and Hospitality leading with 232,000 new hires, it would take irrational exuberance to extrapolate it to perpetuity. With a plausible risk of this tailwind losing momentum, the broader economy could be left high, dry, and strangled with increased borrowing costs.

This could intensify the creeping malaise of defaults and bankruptcies. Corporate defaults rose last month, with 41 in the U.S. so far this year. That’s more than double the same period last year, according to Moody’s Investors Service, which expects the global default rate to rise to 4.6% by the end of the year and 5% by April 2024, higher than the long-term average of 4.1%.

There isn’t much optimism to be found away from home, either. With Chinese recovery after years of strict Covid lockdowns fast losing steam, the slump in the country’s real estate forecasted to last for years, and the government unlikely to pursue an aggressive fiscal stimulus package, it’s unsurprising that global commodities have seen a more than 25% slump over the last 12 months as reflected by the S&P GSCI Commodities index, with Brent crude plunging 34.76% year-on-year despite OPEC’s output cuts coming into play.

Moreover, with the 20-member Eurozone bloc reporting GDP growth of -0.1% for the first quarter, with Ireland, the Netherlands, Germany, and Greece reporting an economic quarter-on-quarter contraction, it is difficult to see where the demand that could make the Chinese manufacturing fire on all cylinders and lift the commodity prices is going to come from.

Amid this general doom and gloom, HSBC Asset Management’s warning that a U.S. recession is coming this year, with Europe to follow in 2024, is gaining credibility with each passing day.


Financial journalists, including yours truly, are often guilty of propagating expert bias in the psychology of human misjudgment by quoting and referring to (undoubtedly well-meaning) economists, who, just like the fabled Chicken Little, convince themselves and others that the sky is falling with every falling acorn.

However, most economists are conspicuously absent from the Forbes list of billionaires and, perhaps even more conspicuously, have not been able to spot a single recession (including the ones in 1990, 2001, and 2008) since the Philly Fed survey started.

Hence, we could attribute their (of late) misfiring forecasts of the recession that’s always around the corner to the tendency of our flawed human minds to first come to a conclusion and then selectively filter facts that strengthen the argument.

Hence, the fact that a resilient economy has been able to successfully weather Covid-19, the bursting of the crypto and the FTX fraud, geopolitical conflicts, a tech bubble 2.0, supply chain shortages, globalization, banking failures, office vacancies, and higher interest rates (just to name a few), is creating a vacuum of cluelessness that narratives such as “rolling recession” and “richcession” are rushing to fill.

In his book Sapiens, historian Yuval Noah Harari interestingly classified chaos into two categories: First-Order Chaos which is unaffected by predictions about it, such as the weather, and Second Order Chaos, which responds and adjusts to predictions about it, such as economics and politics. Therefore, the fact that measuring and forecasting can change the subject makes the latter category infinitely harder to gauge.

Hence, while it is true that some industries are surely shrinking while the overall economy remains above water and major job cuts have been concentrated in higher-paying industries like technology and finance, it might be the widespread cognition about those phenomena that makes the sinking of the broader economy far less likely.

For instance, the federal government and employers in the hotel, retail, and even railroad industries are seeking to hire people who have been laid off by the tech giants.


Howard Marks, in one of his famed memos, wrote about an impressively obvious reply he usually provides whenever he is asked whether we’re heading toward a recession: whenever we’re not in a recession, we’re heading toward one.

However, nobody has any clue when exactly we will bump into one.

Hence, rather than being generals who are good at fighting the last war by building models that incorporate previous problems while being constantly blindsided by new issues, being diligent investors confident enough to increase their stakes in fundamentally strong business when Mr. Market wants to sell his way out could be a time-tested method to navigate the madness.

Financials – Conspicuously Underperforming

Underperforming Despite Tailwinds

The financial cohort has conspicuously underperformed the broader market for the majority of 2018. The group didn’t participate in the broader market performance in Q3 where the S&P 500 had its best quarter since 2013. Banks have had domestic and global economic expansion tailwinds at its back while posting accelerating revenue growth, increasing dividend payouts, engaging in a record number of share buybacks and benefiting from tax reform. Augmenting this economic backdrop is a record number of IPOs, a record number of global merger and acquisitions, rising interest rates, deregulation, and tax reform. Banks are benefiting in unique ways due to the consulting fees regarding mergers and acquisitions and trading around market volatility. All of these elements provide an ideal confluence that bodes well for the financial sector. JP Morgan (JPM), Citi (C), Wells Fargo (WFC), Goldman Sachs (GS) and Bank of America (BAC) seemed to be poised to continue to benefit from the favorable economic backdrop. Thus far in 2018 the financials have performed terribly considering the broader market performance and the aforementioned economic tailwinds. There’s negative sentiment that’s placed the financials in a holding pattern for much of 2018 over concerns of rapid interest rate increases and an inverted yield curve.

The Federal Reserve, Rising Interest Rates and Economic Strength

The Federal Reserve expects the economy to continue to strengthen and inflation to rise shortly. The economic strength coupled with the threat of inflation provides an environment that’s ripe for rising interest rates. The Federal Reserve has been very bullish on the domestic front and signaled that rate hikes will continue and may even accelerate its pace of rate hikes contingent on inflation and economic strength. There’s no question that the financials benefit from rising interest rates, and Bank of America(BAC) has one of the largest deposit bases among all banks and serves as a pure play on rising interest rates. Goldman Sachs (GS) has even branched out into consumer banking with its Marcus product so needless to say all big banks will benefit from their deposit bases.

Federal Reserve Chairman Jerome Powell stated that the unemployment rate currently stands at 3.9%, near a 50-year low while core inflation is right around 2%. Powell said that these two metrics are part of a “very good” economy that boasts “a remarkably positive outlook” from forecasters. The central bank approved a quarter point hike rate in the funds rate that now stands at 2.25%, and the committee indicated that another rate hike would happen before the end of the year. 2019 will likely see three more rate hikes and 2020 will see one rate hike before pausing to assess the delicate balance of rising rates in the midst of a strong economy while taming inflation. Continue reading "Financials – Conspicuously Underperforming"