Bank of America Corp (NYSE: BAC)
Bank of America had an incredible day on Friday and considering the reason for the rally, I’m expecting to see more gains. This is much needed news for the stock as it has been choppy at best when compared to other securities in the US market. Today, we’ll talk about why Bank of America had such a positive day in the market Friday and what Friday’s news means for the stock moving forward. So, let’s get right to it…
Interest Rates Are Going Up
On Friday, vital data with regard to the United States economy was released, the US jobs report. After a rough two months, economists weren’t expecting to see much by way of positivity from the report. In fact, most expected jobs in the US to grow by between 160,000 and 180,000 for the month. However, when the report was released, it showed that during the month of October the United States added 271,000 jobs to the economy – a very robust rebound! This data is even more important now since the Federal Reserve is planning on increasing its interest rate by the end of 2015, and this news is going to make that possible.
The reality is that the Federal Reserve would have liked to increase its interest rate earlier in the year. However, US economic conditions simply didn’t support the idea of a rate hike. Nonetheless, the strong jobs growth is a sign that the economy is strong enough to withstand a rate hike without spiraling out of control. So, most are now expecting the hike to happen in December.
What This Means For Bank of America
When you think about how Bank of America makes its money, what’s the first thing that comes to mind? If you’re like most people, you’re probably thinking about interest rates on loans. While BAC has several different streams of revenue, one of the largest streams of revenue is interest on loans. Essentially, Bank of America borrows money from the Federal Reserve, paying the Federal Funds interest rate on the money they borrow. From there, Bank of America makes a profit by charging a mark up on the Federal Reserve’s rate. When the Federal Reserve’s rate is low, the markup on loans offered through the bank is relatively low. Adversely, when the Federal Reserve’s interest rate is high, the markup that Bank of America charges on loans is relatively high. As a result, BAC makes far more money under high interest rate conditions than it does under low interest rate conditions.
What This Means For BAC Moving Forward
Moving forward, the idea that the Federal Reserve is likely to increase its interest rate soon is incredibly positive news for Bank of America and its stock holders. The reality is that under higher interest rate conditions, the bank is going to make far more money on the credit cards, auto loans, personal loans, mortgages and more that it offers. In turn, investors will see more revenue and more earnings on quarterly reports, leading to investor excitement. This is likely to send Bank of America and other banking stocks upward.
What Do You Think?
Where do you think BAC is headed and why? Let us know in the comments below!
[Image Courtesy of Fox News]