What happened
Shares of Bank of America (BAC 1.53%) traded down 4% on Friday afternoon on investor fears that falling bond yields and the potential for a slowing economy will eat into results. Bank of America missed out on a Federal Reserve-inspired rally on Thursday, falling 1%, and continued its downward spiral on Friday as investors digested what the Fed's moves might mean for banks.
So what
Bank stocks, including Bank of America, were under pressure on Friday after the Federal Reserve indicated it intends to take a more cautious approach on interest rates due to fears of economic weakness. The comments led to a rally in bond prices and resulted in the yield on a two-year Treasury bond rising above the yield on a 10-year, a so-called inverted yield curve.
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If history is a guide, an inverted yield curve is an indicator that a recession is on the horizon. Inverted yield curves also make lending less lucrative to banks.
Bank of America, as one of the largest U.S. banks in terms of deposits, is more reliant on commercial banking than some of its peers and is generally viewed as more susceptible to weakness in the U.S. economy. Therefore, its shares tend to be sensitive to changes in the economic outlook.
Check out the latest earnings call transcript for Bank of America.
Now what
Shares of Bank of America were up 18% year to date as of March 19 but have given back about half of those gains in the last few days. It's possible the declines are an overreaction, but given the growing amount of economic uncertainty, it's far from certain the shares will correct course any time soon.
Shares of Bank of America have almost doubled over the past three years, even after the recent declines. With yields falling and the Fed rate-hike cycle on hold, the stock could be stuck in neutral for the time being.
