Why Bank of America's Stock Rose on Wednesday
As if Bank of America's (NYSE: BAC) more than 100% rally over the past year wasn't enough, its stock is surging yet again. Halfway through the trading day on Wednesday, shares of the nation's second biggest bank by assets are up 3.6%.
The surge on Wednesday comes on the heels of Trump's Tuesday-night speech to Congress, which struck a more conciliatory tone than investors seem to have expected. He called for a "renewal of the American spirit," tax and immigration reform, and a reduction in regulations. The net result, he promised, is that "dying industries will come roaring back."
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"I think investors were set up for hearing a real negative speech, which is more indicative of Trump's style," said Wayne Wicker, chief investment officer at ICMA-RC, as quoted by USA Today. "Just having a positive tone suggests to investors that his fiscal policies might have a better opportunity to move forward."
Significantly, at least when it comes to Bank of America, Trump didn't mention one of his main campaign vows: to deregulate the bank industry. Some have taken this as a sign that it's further down the priority list than immigration, healthcare, and tax reform. Another way to look at this, however, is that the anticipated changes in the financial services sector will occur by appointing new personnel to run the regulatory agencies.
Either way, bank stocks were some of today's biggest winners. While the S&P 500 is up 1.4%, the KBW Bank Index is up 3.3% in intraday trading.
The outperformance of bank stocks centers around optimism that banks will benefit more than other companies from a combination of tax and regulatory relief, coupled with aggressive fiscal policy such as Trump's promised $1 trillion infrastructure package. But the problem is that many of these things will need to get through Congress, where Trump is facing resistance from within his own party.
Fiscal conservatives are concerned that Trump's proposals will dramatically increase the national debt, something they've campaigned against for years. It's for this reason that many Republicans have begun to question where the funds to pay for a wall on the border with Mexico will come from. The same is true for Trump's infrastructure proposal. And there are similar concerns about repealing and replacing Obamacare.
This presents a risk to investors, and none more so than shareholders of Bank of America, which has seen its stock rocket higher since the presidential election. In short, if the White House isn't able to deliver on these promises, then it seems reasonable to conclude that the post-election surge could peter out, if not outright reverse itself.
Fortunately, even if it does, it's not as if Bank of America's shares are trading at an unreasonable valuation today. While the average big bank stock is priced at a 57% premium to book value, Bank of America's premium is a mere 6%. This leaves shareholders of the North Carolina-based bank a larger margin for error than investors in other big banks.
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John Maxfield owns shares of Bank of America. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.